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Home truths: heat rises on affordability problems 

Actuaries Institute and consumer group research reports have highlighted rising home insurance affordability problems in parts of Australia and set out proposals for action, as consensus rises on some issues while immediate solutions remain a challenge. 

The Home Insurance Affordability Update released by the Actuaries Institute estimates 1.24 million households, or nearly one in eight, are facing cover affordability stress, up from one million a year ago. The medium premium rose 28% in the year to March 31, with gains up to 50% for highest risk properties. 

Update co-author Sharanjit Paddam, from Finity’s Climate Analytics Practice, says it’s the largest increase in premiums he has have seen over the last two decades and reflects building cost inflation driven by supply chain shortages, an increase in natural disasters and reinsurance costs. 

“Based on science, we expect these home insurance affordability pressures are likely to continue to worsen due to climate change. If we don’t take policy action now, we can expect to have more people abandoning home insurance,” he says. 

Another report released in the past week, Weathering the Storm: Insurance in a changing climate, commissioned by Choice, Climate Council, Financial Rights Legal Centre, Financial Counselling Australia and the Tenants Union of NSW, finds 67% of policyholders in surveys reported higher-than-expected premium increases. 

Premium pressures are not about to ease. Reinsurers are recalibrating prices and attachment points given record Australian and New Zealand natural disasters and insurers are more wary of catastrophe exposed properties following the impact of claims paid out. 

Australian Prudential Regulation Authority general insurance data shows that in the year to March houseowner/householder underwriting losses worsened to $320 million from $276 million a year earlier.  

A second report released by the actuaries, Funding for Flood Costs: Affordability, Availability and Public Policy Options, looks at short-term cost-reduction measures, medium term responses involving redistribution of cost through risk sharing and long-term measures to reduce risk. 

The report highlights the advantage of government direct action through removing insurance taxes, an issue the Insurance Council of Australia (ICA) has been pushing for years, but states haven’t been in a hurry to relinquish the revenues and find alternatives. 

The actuaries and consumer group reports float the idea of subsidies for those on low incomes, but the Federal Government is not anxious to take that path. In response to northern Australian issues, it chose to back the cyclone pool and more broadly is investing in mitigation. Consumer groups also suggest governments could expand funding for microfinance product trials to assist people on lower incomes. 

In the medium-term relief on flood risks could be considered through cost-sharing scenarios, such as a pool, the Actuaries Institute says, with last year’s catastrophes driving some suggestions that the cyclone reinsurance pool should be extended to all floods. 

But Actuaries Institute research shows addressing Australia-wide flood issues is not as simple as extending the cyclone pool, given its specific design and rules. 

“Flood risk is highly localised and disproportionately affects a relatively small number of households which are the most affordability-stressed,” the report says.  

“Unlike cyclone, the majority of policyholders with little or no flood risk pay no flood premium, meaning it is not possible to fund a flood solution from low-risk policyholders without their costs increasing, which would be a breach of the design rules that apply to the cyclone pool.” 

The report notes examples of overseas pools with different arrangements, including a broad-based community rating approach. 

The French Caisse Centrale de Reassurance requires all individuals to pay a fixed amount proportional to property value, reflecting a constitutional concept that enshrines “all French citizens to be equal and united in solidarity when faced with loss resulting from natural disasters”.  

If a flood pool were to be introduced, the Actuaries Institute says it should have a risk reduction focus, and the group highlights the need generally for continual investment in risk reduction at the larger-scale community level and at household level to ease risks. 

Both reports stress the importance of mitigation and resilience and propose ways in which that can be encouraged at household level. 

Consumer groups say people should be able to take simple steps to make their home more resilient, insurers should be required to consider the impact of any measures that a person has taken to reduce risks when determining pricing, and should explain how this has been assessed, and the requirement should be reviewable by the Australian Financial Complaints Authority.  

The Actuaries Institute acknowledges the difficulty in assessing the effectiveness of individual household level risk mitigation in practice, which requires technical expertise and can be costly, but says there are promising developments. 

An example is the resilience rating system, under development by the Resilience Building Council and to be launched next year, it says, which could help measure the resilience of a property and outline adaptation actions.  

The National Emergency Management Agency through the Strategic Insurance Project, is leading the development of a national mitigation measure knowledge base that will support households to understand their risk and the actions they can take to reduce risk. 

Consumer groups also note that in preventing underinsurance, it’s not just a matter of affordability, policies are often overly complex and are not well understood, and people may find when they make a claim that they aren’t covered, or that they are underinsured. 

Broadly, there’s increasing consensus on the need for better land-use planning rules to prevent more people being put in harm’s way and support for relocations where risk simply can’t be minimised in some locations.  

Progress is being made on some of the issues raised in the reports, but achieving action for the near and long-term is no small task. For many people the crunch time is now and the studies suggest the number of people facing that scenario will increase without an urgency of action. 

“It has been particularly concerning to see how many people were left without flood cover after the last few years of record rainfall, due to inability to afford the premiums,” Financial Rights Legal Centre CEO Karen Cox says. “Many people are being left behind by rising insurance premiums in the face of increasing climate-related risk.”