The Australian Competition and Consumer Commission (ACCC) has concluded its three-year inquiry into insurance affordability and availability in northern Australia and how to promote more informed and more competitive insurance markets.
ACCC says in its final report released on 28 December that its analysis shows that home, contents and strata premiums are, on average, considerably higher in northern Australia than the rest of Australia and have increased more over the last decade. Rates of non-insurance are increasing and cost is the main reason.
ACCC says that there are genuine reasons why insurance premiums for home, contents and strata insurance are more expensive in northern Australia. The region is riskier and the cost to serve it can be very high. In addition, insurance markets in northern Australia are not working as effectively as they could be for consumers and this is exacerbating affordability concerns.
The final report contains 38 recommendations to improve the situation, with many following those set out in previous interim reports.
To address affordability and availability issues in northern Australia, ACCC investigated the relative merits of a range of measures including government reinsurance pools, government insurers or mutuals, direct subsidies, mitigation programmes and licence conditions.
If governments want to intervene to provide immediate relief to consumers facing acute affordability pressures, they should consider direct subsidies over other measures. Direct subsidies have the greatest potential to work in a targeted way to relieve some of the acute affordability and cost of living pressures facing consumers in higher risk areas, at a lower cost and more effectively than other measures.
The report makes a number of important recommendations aimed at providing consumers with the clear and simple information they need to make more confident decisions, including introducing standard definitions for prescribed events and requiring insurers to provide a product consistent with a revised standard cover product.
Insurance brokers can serve an important role for consumers in assessing risk, sourcing quotes, and claims management. However, there is a significant conflict of interest between an insurance broker’s obligations to act on behalf of a consumer while being remunerated by an insurer.
The report recommends prohibiting conflicted remuneration for brokers. Commissions paid to intermediaries in northern Australia can have a significant effect on the final premium that consumers are charged. Base commission rates of 15 to 20% are common, and total incentive payments can reach in excess of 30% of the cost of the premium.
Reforms to land use planning and building standards
The report recommends that the insurance industry works with governments to identify specific public mitigation works that could be undertaken and that insurers provide estimates of the premium reductions they anticipate if the works were to proceed, and report on actual premium reductions after any works are carried out. Private (household level) mitigation is important too, but the ACCC does not yet see evidence of systemic reductions in premiums for customers who make this investment. Many insurers still don’t have systems in place to identify and support consumers’ efforts to reduce risk, which is at odds with insurers’ advancements in granular pricing more generally.
The report also recommends the remit of the Australian Building Codes Board be expanded, to enable it to directly consider property protection and resilience measures when developing building standards.
The insurance industry is urged too to work with Standards Australia to develop voluntary standards for even more resilient homes and for mitigation works on existing properties.
Better consideration of insurance in land use planning could help avoid affordability problems getting significantly worse Insurers have claimed that inappropriate land use planning has contributed to high insurance premiums in parts of northern Australia.
While planners may consider the risk to people and damage to properties in their assessments, state and territory governments in northern Australia do not explicitly consider insurance implications. State and territory governments should consider how their respective planning frameworks could allow planners to explicitly take into account insurance affordability and availability under existing planning objectives, and provide guidance to planners on how to do so.
When considering natural hazard risks, insurers and planners use different information sources, consider different parameters, and use different timescales. There is scope for better communication between planners and insurers on their respective approaches to risk, and to explore opportunities for collaboration between state and territory governments and insurers on data gathering and sharing. This could, for example, include the potential for co-funding arrangements between governments and the insurance industry to develop data that can meet both planning and insurance requirements.