Households in up to 12% of Australian postcodes may face pressure meeting annual home insurance premiums, a figure which represents around 7% of Australia’s population, according to a major research paper from the Actuaries Institute.
The paper states Australia has a sophisticated approach to pricing risk for natural disasters, which is reflected in premiums that can vary from less than A$1,000 ($743) a year to above A$10,000. But there is no clear and widely accepted measure for whether insurance is affordable, and data is lacking to gauge the depth of the problem. Without a measure of affordability and better publicly available data, it is difficult to target relief to those who need it.
The paper, Property Insurance Affordability: Challenges and Potential Solutions, aims to help policymakers better understand affordability issues, said Hoa Bui, president of the Actuaries Institute.
Policymakers are looking for better ways to deal with these issues, as evidenced by the Australian Competition and Consumer Commission inquiry and the Royal Commission into natural disasters.
A key feature of addressing affordability pressures involves increased mitigation. Government taxes could also be reviewed. But there is a compelling case for public policymakers to provide some support for those facing unaffordable premiums while still using economic incentives to encourage better behaviour to reduce risks in the long-term, says the paper.
Support can be targeted through changes to insurance products and premium design (including, for example, community rating and risk equalisation), by providing direct subsidies or rebates, or by changing how insurance risk is pooled, either at the insurance or reinsurance level.
The arguments for targeted policies to reduce premium stress include increasing the take up of insurance, creating funds for research and mitigation, reducing government expenditure on post-event recovery, reducing intangible costs (such as mental health impact) in the event of loss from the ‘peace of mind’ that insurance can provide, and increasing overall economic activity by enabling development.
Guiding principles for change include:
• proper incentives for mitigation to lower overall losses over time;
• well-functioning private insurance markets which limit government intervention are desirable in an economy such as Australia’s; and
• risk-based pricing to support long-term policy goals.
The paper states there is a need for temporary and targeted government intervention to help manage affordability, in at least the near term. Policy solutions should be reviewed as conditions change. Addressing affordability should include targeting the vulnerable, sending the correct economic signals to consumers and identifying what changes in behaviour are needed.
The paper deals with issues like: How much economic pain is acceptable for consumers or households to bear? Should losses be funded pre- or post-events, and in what proportion? To what extent should costs be pushed out and thus borne by future generations?
“The overall goal should be to improve the risk profile of the population to maximise insurability of properties and minimise the need, in the longer term, for ongoing government intervention to promote resilient communities,” the paper states. “We need to future proof Australia in a cost-effective manner to make affordable insurance available to as many people as possible.”