The insurance peak body defended the industry against accusations of price gouging at today’s session of the Senate inquiry into the impact of climate risk on premiums, as consumer groups sought a regulatory crackdown to lift affordability.

Insurance Council of Australia COO Kylie Macfarlane told the hearing that premiums reflect challenging market conditions, including inflation in sectors such as construction.

“The cost of repairing or rebuilding a home is now 27% higher than it was at the start of the Covid-19 pandemic,” she said.

She said vulnerability to extreme weather is another pricing driver, and more work is needed to address such risks. 

“When we build suburbs on floodplains, when we don’t have a construction code that eliminates or mitigates the risk of the extreme weather that they face day to day, those failings are now being priced into insurance premiums. We have a competitive market ... there is availability. However where those vulnerable communities continue to be put in vulnerable situations due to extreme weather, their premiums will reflect that.”

Inquiry chair Mehreen Faruqi questioned how major insurers could raise premiums while also reporting significant profits in their most recent results. 

Ms Macfarlane responded: “We have been in a benign extreme weather environment [in the past year]. Market investment returns have been strong and that has contributed significantly to rising profits in the insurance sector. We’ve seen a softening of reinsurance costs, albeit they are still high ... and they have contributed to profitability this year.

“Profitability allows insurers to pay claims, and we need to adjust that profitability to be able to recoup an incredibly high number of claims in previous years. It would take one significant weather event, like [the February and March 2022 floods], to see insurers’ profits be significantly impacted again.”

Ms Macfarlane said continued government investment in mitigation is needed, while in the short term, the removal of state insurance taxes is an “essential reform to deliver cost-of-living relief”. 

“Last year the states collected more in stamp duty revenue from insurance products than the insurance industry made in profit: approximately over $7 billion in stamp duty tax, versus approximately $4.5 billion in profit.” 

Consumer group Choice’s campaigns and communications director Rosie Thomas agreed removing insurance taxes and increasing government investment in mitigation will help reduce premiums.

However, she said the industry has failed to address “low-hanging fruit” such as “loyalty taxes” and premiums that are more expensive for those who choose to pay monthly.

“We do need a lot of the bigger systemic reforms and steps to address risks and mitigation more broadly, but it’s also important that we don’t lose sight that the insurance companies are doing things unrelated to climate risk that are contributing to the affordability problem too,” she said.

Financial Rights Legal Centre senior policy and communications officer Julia Davis said the industry is unwilling to work with consumers on affordability issues. 

“We get calls [like this] every single day, people cannot understand why their insurance has gone up and when they call their insurer, they do not get an answer,” she said. “So not only do we think you should get an answer when your insurance goes up, [the information] should be in your renewal paperwork."

She said the government needs to “get involved”, including introducing a standard monitor for pricing, noting the “market is not going to solve these problems”. 

“When we do get a regulator in place who has the power to investigate pricing, they find all kinds of unexplainable, erratic, unjustifiable pricing,” Ms Davis said.

“So, whether or not it’s been done cynically trying to gouge consumers of their money or poor systems, or sloppy, or they are just trying to cover losses in one area and put them somewhere else, I don’t know. But I wouldn’t say it’s fair.” 

Ms Davis also supports standardising insurance products to ensure policyholders are covered for key risks. 

“We have seen a disturbing trend in recent years of insurers responding to growing climate risks by withdrawing from the market by stealth,” she said. “By that, I mean changing the definitions of perils in their policies in ways that mean consumers are opting out of cover without realising it.

“We need to get back to a place where there is a standard product, and if insurers want to add to it and have a gold and platinum on top, great. But right now there is no base product that consumers can rely on."

Recordings and transcripts of the hearing can be found here.