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
