The Australian Government Actuary’s (AGA) report on strata title pricing in north Queensland provides no comfort for unit owners faced with huge premium increases – but it does shed light on the underlying factors that have led to rate rises of thousands of dollars.

Government Actuary Peter Martin says historical underpricing, better allocation of reinsurance costs to risk and last year’s disaster losses have driven price increases.

“Although my analysis suggests prices are now more likely to better reflect the underlying risk than previously, the experience of the past six years would not support a view that prices today are unreasonably high,” he says.

The report says more insurers may enter the market now prices have risen.

The AGA study, commissioned by the Federal Government after last year’s inquiry into the operations of the insurance industry during disasters, clears insurers of price gouging and says that from 2007 they got their pricing wrong “by a large margin”.

The outcome is a disappointment for north Queensland Federal MP Warren Entsch, who has branded the report a “whitewash” and says availability and affordability are issues for residential and commercial property owners.

insuranceNEWS.com.au understands some property owners cannot get insurance from any of the three underwriters covering the market: Zurich, CGU and Vero.

Lack of competition has been cited as a reason for premium increases, but the AGA report says if north Queensland strata was more profitable other insurers might enter the market.

The AGA used 2007-2012 data from the three companies, finding that for every $100 of premium earned plus investment earnings, insurers spent $130 on claims, commissions and operating expenses.

The $160 cost per $100 premium earned over the period would have been a $135 cost if Mackay had been excluded.

Mr Martin says a 60-70% increase in reinsurance since 2007 is not enough to account for the size of the premium increases.

He notes that north Queensland catastrophe cover is a small part of any insurer’s reinsurance purchase, and insurers allocate the reinsurance cost to policies within their portfolio.

As catastrophe modelling has become more sophisticated, insurers have been able to allocate reinsurance costs more accurately.

“Insurers have become aware over the past few years that, for pricing purposes, they have not been allocating reinsurance costs efficiently in line with underlying risk,” the report says.

The AGA says rates on small business segments can get little attention as long as they do not incur significant losses. “Loss-making experience is likely to focus an insurer’s mind, even if the losses arise in a small business segment.”

Insurers pay attention to operations that make losses, and the more data they have “the greater is the depth of analysis that can be undertaken”.

In some insurance markets, such as motor, insurers get good estimates of risk but this is harder in segments such as north Queensland strata, which can be hit by severe weather events.

The city of Mackay is a small part of insurers’ north Queensland strata business, but the 2008 storms there affected insurers’ profitability not only that year but for the six years reviewed.

The $160 cost per $100 of premium earned over the period would have been a $135 cost if Mackay had been excluded.

The report says much of the strata development in the region has occurred over the past decade, so insurers have limited data to use for pricing.

Financial Services Minister Bill Shorten says he will discuss the strata issue with the Insurance Reform Advisory Group, noting pricing errors observed in the report “are unlikely to engender confidence in the insurance industry, and this is clearly one of the lessons for the industry to learn”.

He says the Insurance Council of Australia has suggested strata complexes could reduce their premiums by accepting a higher excess, and options such as this are worth examining in more detail.