Are premiums under pressure again?
The Insurance Council of Australia’s (ICA) most recent Insurance Catastrophe Resilience Report reveals that the impact of extreme weather on the Australian economy has more than tripled over the last three decades.
Insurers have paid an average of $2.1 billion per year to customers impacted by extreme weather events over the last 30 years. But in the last five years, the average annual cost has more than doubled to $4.5 billion, mainly driven by the growing cost of flood.
In fact, the 2022 southeast Queensland/Northern NSW flooding and storms resulted in nearly $8bn paid by insurers and are now the costliest catastrophic events in Australian history.
How does the industry respond?
Insurance moves in cycles, driven by external factors like climatic and economic events.
As insurer profitability declines following catastrophic claims events, insurers tend to look for ways to reduce their overall risk, and the market hardens.
As insurers’ profits strengthen, the market softens. Insurers start to write more business, new entrants emerge, and premiums begin to plateau or even decrease.
We’re currently in a hard market that’s easing. While conditions remain tough, particularly in areas prone to catastrophic weather events, we’ve seen strong signs of a stabilisation and recovery.
So, what lies ahead?
Positive signs of market stability
Affordability
Premiums went through a period of significant increases due to the number and severity of natural disasters, problems with building defects and overall market conditions. However, premium increases have abated over the last 6-9 months, and we've seen positive green shoots emerging from new underwriting entrants.
Cost relief
Reinsurance is insurance for insurance companies to help them fund large losses beyond their financial capability, such as catastrophes. With less capital available in the market due to poorer returns, there was a dramatic increase in reinsurance costs, which insurers passed on to customers through premium increases.
However, Fitch Ratings' global sector rating for insurance is now at "neutral" based on its market view that market conditions have stabilised*.
Availability
Insurers have become more selective in the risks they agree to take on, tightening their underwriting criteria and making it more difficult for some buildings to get insurance cover.
Insurers want to keep customers representing a “good risk” – well-maintained properties with a good claims history. They’re less willing to accept buildings with known defects/cladding and other notable building issues.
Owners must have a plan to complete all outstanding requirements from insurers well before the policy renewal date to help ensure they’ll receive renewal terms. Insurers may also ask owners to provide evidence that they've taken steps to rectify the cause of a defect or that they have a maintenance program in place.
Doing nothing can come at a considerable cost to a strata scheme.
- Less choice of insurers
- Higher insurance premiums and excesses
- Imposed conditions of insurance
- Reduced level of insurance cover
- Declined claims
- Difficulty selling the property
High-risk properties - the insurer’s view
- Located in a disaster-prone area.
- Have ageing infrastructure or hazardous building materials, or no evidence of a high level of upkeep or remediation.
- Poor claims history.
Impact of the Australian Reinsurance Pool Corporation (ARPC)
The government-backed Cyclone Reinsurance Pool (CRP) was implemented so insurance companies could transfer their cyclone risk exposures. It’s a reinsurance arrangement between insurers and the ARPC to address pricing concerns in northern Australia but not to reduce risk in the region.
The CRP doesn’t change a poor-quality risk into a good risk or address broader construction quality concerns or the lack of risk mitigation for floods.
So, the CRP won’t necessarily change an insurer’s view of a property’s risk level, but it should make insurance more affordable and accessible for those whose property presents an acceptable level of risk to insurers and is therefore “insurable”.
In September 2024, the ACCC released its third insurance monitoring report. It confirmed that the CRP now covers 2.9 million households, 90,000 small businesses and 78,000 residential strata properties, and it focuses its benefit on areas at greatest risk of cyclone damage.
The report noted that some regional areas are experiencing quotes 38% lower due to the CRP. The ARPC further advised a ‘significant reduction in average policyholder premiums for the highest risk bands following entry to the cyclone pool – a positive sign that cyclone pool premiums are increasing insurance availability and insurer underwriting appetite in high cyclone risk regions’.
Managing the pain
To put yourself in the best position to benefit from the emerging trends, we’ve put together some tips to support you through 2025.
1. Understand your cover
The building sum insured value covers the cost of replacing a property. Owners must insure for full replacement value of their property, to avoid the need to cover the shortfall if the insurance proves inadequate. Regular valuations can help prevent this.
Always check the adequacy of your sums insured, including sub-limits that could be negotiated upwards to ensure enough cover for loss of rent and temporary accommodation if there’s a long rebuilding process.
Also, consider the litigation exposure to Office Bearers and the scheme’s potential need for legal defence.
2. Review your General Excess
Increasing your Excess may make a difference to the premium. Insurers have been using excesses to manage premium increases and minimise administration for claims under the excess amount.
A $2,000 general excess is typical now. But it's worth seeking quotes if you can absorb and agree to fund losses under a higher excess.
Be aware that insurers may impose a higher excess, like $10,000, when there’s a large sum insured.
Strata schemes should plan for who will pay the excess for a claim. Depending on the circumstances, owners could find themselves responsible for paying the excess. A plan avoids any surprises.
3. Work with a specialist broker
Working out what type of insurance cover is appropriate isn't easy. But getting it wrong can be an expensive mistake.
BCB works with strata managers to drive competition between insurers and limit premium increases for all strata schemes, especially those with standard risks.
Successfully navigating the market involves investment in risk management strategies and significant improvements in the data provided to insurers. A proactive partnership between a broker and strata manager will help build insurers’ confidence and help them accurately price the micro and macro risks to deliver you the most competitive cover possible.
*Fitch Ratings is one of the major global credit rating agencies. A neutral outlook generally indicates a stable environment for the entity or sector being rated.
The information provided is general. It does not constitute legal advice and should not be relied upon as legal advice. BCB recommends seeking advice from a qualified lawyer on any legal issues affecting you before acting on any legal matter. Whilst BCB endeavours to ensure the content of this information sheet is accurate, it does not represent or warrant its accuracy, adequacy or completeness and is not responsible for any loss suffered as a result of or in relation to the use of this information.
