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Top insurance affordability influences go unchecked

Actuaries have painstakingly crunched the numbers on insurance affordability for Australia's 10 million households and the conclusion is clear: the current regime of taxes, building codes and land planning must change.

Taxes make up 21% of home insurance premiums, while 30% of costs are for natural hazards – spread unequally around Australia, a Finity Consulting report commissioned by the Actuaries Institute says.

A million households already spend more than a month’s gross income on home insurance, and going forward affordability pressure will increase most for the nation’s vulnerable households, categorised as already “experiencing extreme home insurance affordability pressure”.

These residents are typically concentrated in Queensland, the NT and northern NSW – the areas most affected by natural disasters.

By 2050, the weather-related natural hazards component of home insurance premiums is expected to increase by a further 6-15%, or $309-782 million, depending on what carbon emissions scenario unfolds.

Cyclone, bushfire and flood costs will “increase materially,” the research calculates.

The paper backs all that the Insurance Council of Australia has long advocated – that extreme weather “doesn’t have to end in disaster,” and governments can lessen the impact by funding stronger buildings and infrastructure measures such as levees, floodways, and bushfire fuel reduction.

ICA wants $2 billion spent this way by government over five years, which it says will cut financial, health and social costs by at least $19 billion by 2050.

“This is the cornerstone of our advocacy,” ICA CEO Andrew Hall said.

The actuaries calculate cyclone risk will add $197 million to home insurance premiums in Australia by 2050, flood $49 million, storm $38 million and bushfire $25 million. That is under a low emissions scenario of a less than 2 degrees Celsius temperature rise.

Meanwhile, infrastructure resilience measures could yield savings of up to 10 times the initial investment.

“The most effective use of finite government resources will be to assist the most vulnerable households expected to experience the greatest pressures from the changing climate,” Actuaries Institute CEO Elayne Grace said.

For some Australians, the answer will be as drastic as getting out of harm’s way.

This has been resorted to before: managed retreat from hazard-prone areas has been carried out in Queensland’s Grantham in 2013, and is underway in New Zealand in some areas damaged by the Christchurch earthquake.

“Communities may need to consider relocating some or all of [their] people and assets, especially in cases where home insurance premiums become unaffordable,” report author and Finity Climate & ESG Risk Actuary Sharanjit Paddam said.

By acting quickly, Mr Paddam says policymakers can “begin to address home insurance premium affordability and the socioeconomic inequities of climate change”. Strong collaboration between governments, insurers and banks, builders and developers and First Nation Australians is required, he says.

The report, based on data from 533 local government areas across Australia, lays stark the affordability pressures of insurance on many Australians.

For households with an annual home insurance premium above $2000, half earn less than $65,000 a year.

The median premium of the million households deemed “vulnerable” equates to 7.4 weeks salary, or 14% of annual gross income. Removal of all tax charges would cut this to 6.6 weeks.

State stamp duty and levies contribute $2.1 billion to annual home insurance premiums and the Actuaries Institute – like the ICA – urges they be scrapped in favour of “more equitable and efficient” sources of revenue.

It also backs the push for more levees, floodways and sea walls, better land use and planning, and changes to building codes.

Australia-wide, the median home insurance premium is currently 1.1 weeks salary or 2% of annual income, which the ICA says “demonstrates that for most, insurance is an affordable and important product”.

However, Australians living in parts of northern Queensland and northern WA pay premiums over $3000 – compared with a mean across Australia of $1534. The components making up that mean are as follows: taxes $328, storm $230, flood $110, cyclone $70, earthquake $35, bushfire $33.

The balance of $728 was made up of insurer expenses, net cost of reinsurance, and profit margin including any cost of capital.

Another Actuaries Institute solution was that insurance subsidies be introduced for low-income households as a supplement to the cyclone reinsurance pool.

“We recommend that government funding in Australia explicitly consider equity for Australia’s most disadvantaged areas, as this will ensure that the resilience measures provide the largest relief to home insurance affordability across Australia,” it said.