The Australian government has spoken out against excessive premiums for home and contents insurance. Assistant Treasurer and Minister for Small Business Kelly O’Dwyer called on the Insurance Council of Australia to reduce the number of underinsured homes in Australia, in a speech at the Council’s annual forum.
The latest data shows Australians spend $35 billion per year on general insurance premiums for their homes, contents, and motor vehicles, and yet in spite of so much spending, many Australians are underinsured or not insured at all. The David Murray Financial System Inquiry’s Final Report showed that 29% of homeowners and 67% of renters in Australia do not have any form of contents insurance.
The Assistant Treasurer said possible reasons for this high level of underinsurance include changes to the insurance environment, such as the sharing economy; emerging risks in today’s world, such as cyber security risks and natural disasters; and taxes on insurance.
Sharing economy challenges insurance providers
The rise of Airbnb has presented major challenges for insurance providers and policyholders. Insurance providers must create new policies or adapt existing policies in order to provide cover for such unusual and temporary renting situations for those who become landlords in their own home.
This is an expensive exercise not just for insurance providers, but also for policyholders. Policyholders may assume they are covered for damage caused by Airbnb or Stayz “guests” when in fact such cover is excluded from their policy. This can mean unexpected expenses when they foot the bill for damage caused by guests, or additional expenses when they purchase an additional insurance policy to cover their Airbnb/Stayz activities.
Cyber security risks
One new and devastating challenge to the security and insurance industries has been the Internet of Things. This is when your devices (from your smartphone to your fridge to your washing machine to your car) are connected to the internet and able to communicate with each other over internet-connected Bluetooth.
This web of inter-connected devices means thieves are now able to break into your home without ever needing to break a window, disabling your home security alarm through your television, stealing your car, and “borrowing” your financial information for later use. A study conducted by HP found 70% of our home’s commonly used devices are major security risks, with around 25 vulnerabilities per device. One vulnerability in one device is enough for a hacker to access your bank account.
This is one new security risk that is almost certainly here to stay. The Swiss Re Group’s SONAR report (2015) estimated that by 2025, a family of four might have around 100 connected devices between them. Samsung has promised that by 2017, 90% of its products will be connected to the Internet of Things. So unless you plan to buy only second-hand whitegoods and devices built before the information age, your home may soon be fully “on the grid”.
Unfortunately, this added cyber security risk naturally makes home and contents insurance premiums more expensive, as it increases the risk of an insurance claim being made. The government has urged the insurance industry to be “on the front foot” when it comes to dealing with new digital technologies such as this.
The message for consumers may be as simple as having fewer smart devices or disabling their internet access, and using multiple security measures. As CANSTAR previously reported, a guard dog is better than an alarm system and is the number one fear of thieves in Australia.
Natural disasters making insurance unaffordable
The recent increase in natural disasters has been exacerbated by a rising population living in affected areas, increasing the number of claims and therefore making insurance unaffordable in some of the regions that need it the most.
The Assistant Treasurer called this a challenge “that must be faced as courageously and resiliently as we can”. If the insurance industry can address this challenge adequately, residents in North Queensland, northern parts of Western Australia, and the Northern Territory will be able to breathe easier with significant decreases in their premiums. These regions have seen increases of up to 80% as at 2013 compared to 12% increases in other capital, with those in North Queensland paying more than twice as much as the national average.
The Assistant Treasurer says that while the government has been addressing the cost of insurance in these areas, more can be done by both homeowners and insurance providers.
The main way the government has been tackling this issue is by launching the new ASIC comparison website for home insurance in North Queensland. ASIC keeps the website up-to-date with policy and pricing changes. The Federal and Queensland Governments are currently co-developing a similar website for strata properties in North Queensland, which would also suggest ways to make specific properties more resilient.
Government recommendations for further government action on natural disasters
Different ways to lower insurance premiums for high cyclone risk areas was also discussed in the Northern Australia Insurance Premiums Taskforce Final Report released on 4 March 2016. The government is now considering the Taskforce’s findings, which were that most mitigation options would be very costly for the taxpayer:
- A cyclone mutual insurance scheme: Providing direct cover from governments to households in cyclone zones would reduce competition for private insurance providers.
- A cyclone reinsurer: Providing government reinsurance to private insurance providers, such as was introduced for terrorism insurance in 2003, would be difficult. Once the government has met a market failure and involved itself in a reinsurance scheme, it is typically difficult to withdraw because of the risk of the private market not meeting the need, and because the private market will often immediately increase premiums again when it returns to providing that insurance.
The Taskforce calculated that any government scheme that would lower premiums by 10-15% on average would then cost the Government more than $2 billion over 10 years, with a low chance the cost would be more than $5 billion.
The Assistant Treasurer says State governments could strengthen building standards, to reduce the damage caused by severe weather events. Local governments could then undertake public works on water management and flood protection infrastructure to reduce the risk of flood damage to properties. For example, the government is funding flood mitigation work in Roma and Ipswich to reduce the damage caused by future floods.
Government recommendations for insurance providers on natural disasters
Insurance companies have estimated that mitigation actions that build property resilience and prevent damage could reduce premiums by up to 20%. So why haven’t we seen a 20% decrease in premiums in recent times as various regions engage in resilience improvements?
This month Suncorp has tackled this type of policy with their new Suncorp Insurance Cyclone Resilience Benefit. This is a discount on home and contents insurance premiums in cyclone areas, available for policyholders who take cyclone mitigation measures to protect their property.
The government advises that other insurance providers need to roll out such products and policies, and quickly. They questioned why insurers have not been able to reward cyclone damage mitigation, when they already reward theft mitigation by providing discounted premiums to households that install deadlocks and back-to-base alarms.
Government taxes on insurance
The Assistant Treasurer said the government recognises that state and territory taxes on insurance may be creating a barrier for homeowners by increasing premiums. She said:
“Insurance taxes are among the most inefficient taxes in Australia. They increase the cost of insurance to consumers and place a large burden on policyholders.”
Insurance stamp duties in the Northern Territory and Western Australia are 10% of the policy premium, while in Queensland they had increased to 9% by 2013. This has contributed to making insurance unaffordable for poorer households.
The government recognises they need to create “a better tax system that will set Australia up for the future, supporting higher economic growth, job creation, and better living standards for all Australians”. However, the Federal Government has not promised to pressure states and territories to reduce their taxes.