Double-whammy: Household insurance costs to soar again, adding to inflation

Consumers will be hit with another steep rise in their household and car insurance premiums this year as general insurers push revenue growth ahead of rising inflation costs.

Actuarial group Finity is forecasting a 12 per cent jump in premiums this year for two of the biggest general insurance sectors – home and car insurance – based on industry statistics and recent forecasts from the industry including listed insurers like IAG and Suncorp.

It says the big price rises have helped ensure that insurer’s profit margins are at the top of the curve, although that could change rapidly thanks to the volatility of climate change.

The 2020 floods in northern NSW and southern Queensland provided a financial shock for insurers that is still being felt by customers across Australia. Credit: Josh Dye

Rising premiums are just one of the fronts where general insurers have been coming under pressure over their actions in the $100 billion market – including an inquiry into their tardy response to flooding in Queensland and northern NSW in 2022.

“The insurance sector has been under significant scrutiny, following the reviews into the devastating flood events, the challenges associated with affordability and accessibility and the media commentary on insurers’ strong financial results of the latest reporting season,” APRA’s Suzanne Smith told an insurance industry conference in October.

“Consumers have now faced multiple years of substantial premium increases, driven by the rising costs of these natural disasters along with inflationary pressures, increased re-insurance costs, higher building standards and advanced technologies, to name just a few.”

The soaring premiums provide a double-whammy for struggling households. The first hit is the direct cost of soaring insurance bills, the second is its outsized impact on inflation – ensuring interest rates also stay higher for longer. The cost of vehicle and household insurance has risen by $11.7 billion over three years, Finity estimates.

So any suggestion that investors are profiting from customers’ financial pain is sensitive to say the least.

“Profitability for the industry (last year) was towards the top end of the target range … that was largely due to strong premium growth,” Finity principal Pravesh Ponna, says.

This year is expected to be another stellar year for the owners of our big insurers with Finity forecasting that return on equity (ROE), a key measure of financial returns, is expected to be at the top end of the sector’s long-term average at 15 per cent.

And it is reflected in the share prices of Australia’s listed insurers like the $20 billion IAG – the company behind brands like NRMA and CGU – which has only traded higher than its current share price for a brief period in 2018.

IAG chief executive Nick Hawkins says insurance costs are easing but not enough to prevent premium increases well above the inflation rate.Credit: Dominic Lorrimer

Suncorp – which owns AAMI, GIO and still tips the scales at a valuation of $25 billion despite the recent sale of its banking business to ANZ – has not traded this high since 2007.

Both have said recently that their overall general insurance premiums are set to rise mid-to-high single digit amounts this year – above inflation but below the increases of recent years.

IAG chief executive Nick Hawkins also said inflation is easing in motor vehicle policies, but double-digit inflation in costs for housing insurance will be reflected in its pricing.

“We continue to see labour rates in the high single, or early double-digits, and we are seeing building supply costs still high,” he told analysts and investors.

The group is forecasting an insurance profit margin of up to 15.5 per cent this year.

But following the release of Finity’s report on the sector last month, Ponna warned against reading too much into these fat financial margins.

For one, investment returns on funds retained for potential insurance payouts – which hit a decade high of 6 per cent last year – helped boost financial returns.

But more importantly, general insurers benefited from a respite from the perilous weather events that could quickly swamp this financially sunny outlook.

Macquarie Research noted the Australian September quarter results for global insurer, Allianz, which reported a “benign NatCat” (natural catastrophe) experience, not just “very strong” premium rate rises.

Catastrophe events are defined by the industry as an occurrence “which is sudden and widespread and which causes substantial damage to property over a large area”.

To get an idea of the impact of catastrophe events, you only have to look back to the 2022 floods which triggered a fundamental restructure of the general insurance cost base in Australia.

“That was a really big event for the industry,” Ponna says. “It caused a lot of losses for insurers, and caused a lot of losses for reinsurers.”

Reinsurers – global financial giants which allow insurers to take out their own insurance against catastrophes – recalibrated both their costs and risk appetite in a manner which has filtered all the way through to consumer costs.

Climate change is increasing the frequency of extreme weather across the globe. Credit: AP

Reinsurers increased the costs of their service significantly, says Ponna, and they also reduced their exposure to these perils in Australia.

This means local insurers have had to take on significantly more risk for the next big catastrophe event. They have had to increase pricing significantly to both cover the higher reinsurance costs and build the financial buffers to protect themselves from higher financial exposure.

“That happened over the course of two years. There were two pretty tough renewals for the insurance industry, and that obviously plays out in terms of more volatility for direct insurers to accept, and also higher reinsurance costs which flow through to the prices that consumers pay,” Ponna says.

The issue for investors is that local insurers won’t really know how well protected they are until the next catastrophe occurs. IAG cites a recent reinsurance deal with Warren Buffett-backed National Indemnity Company as a significant mitigator for its business.

“The deal will provide greater certainty over the cost of natural perils cover for our customers, stabilise our earnings and reduce our capital requirements,” Hawkins says.

While this year’s reinsurance increases are more benign, the growing weather volatility due to global warming means there is no assurance the new status quo will remain for any significant length of time.

“What we’ve learned with climate change, and the impact of natural catastrophes, is there’s more volatility associated, and you get a more unique sort of events now that you haven’t seen in the past, which might trigger reinsurers to rethink those models again,” Ponna says.

“We now think we’re in a steady state with the reinsurance market, but time will tell.”

Unusually catastrophic weather is not the only cloud on the horizon for some insurers.

IAG is still in a legal battle with the Australian Securities and Investments Commission (ASIC) which has alleged the insurer deliberately pumped up premiums for loyal customers.

The matter, which IAG is defending, is now the subject of a class action.

But this is a small problem next to the rising issue of insurance stress for cash-strapped households.

A report in August from the Actuaries Institute detailed the growing problem which is leading to an insurance gap as more homes effectively become uninsurable.

It said more than 1.6 million households were experiencing home insurance affordability stress as at March 2024 – defined as paying premiums equal to more than 4 weeks gross pay – up 30 per cent on the prior year.

“The most significant driver of affordability stress is exposure to flood risk,” the report said.

Across the country, the average flood premium paid by these stressed households is around 16 times higher than non-stressed households.

The affordability problem is also on the radar of the prudential regulator, APRA.

“What comes through loud and clear is that Australians continue to face significant challenges with the affordability and accessibility of insurance. Much more needs to be done to reduce the widening protection gap for consumers, who already struggle with the increased cost of living,” APRA’s Smith says.

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