Residential strata title insurance premiums in north Queensland have been underpriced for years and the business has provided poor returns to insurers, according to an Australian Government Actuary (AGA) report.

The investigation into strata pricing found average premiums have tripled since 2007, with a sharp increase in 2011/12.

But for every $100 of premium earned over the past six years, plus investment returns, insurers have paid out $130 in claims, commissions and operating expenses.

The calculations exclude reinsurance costs, which Government Actuary Peter Martin estimates have risen by 65% since 2007.

The report blames recent steep price increases on underpricing, improved allocation of reinsurance cost to policies and natural disaster losses.

The Federal Government ordered the AGA in June to investigate the causes of premium increases, following the House of Representatives inquiry into the operation of the insurance industry during disasters.

The AGA used data from the three major strata insurers – CGU, Suncorp and Zurich – from 2007 to this year. It says the business has been underpriced and insurers have not been price gouging.

Zurich CEO Daniel Fogarty says the AGA report “vindicates the approach we took in dealing with this”.

“It shows we went about things the right way,” he told insuranceNEWS.com.au. “We had a choice of pulling out of the market or supporting the business we were on, but pricing the risk accurately.

“We took a lot of heat, but we also made sure everyone, including the parliamentary inquiry, understood why we were taking the approach we did.

“It’s good to see the Government Actuary agrees there hasn’t been any profit for insurers in this small segment for a long time.”

But North Queensland MP Warren Entsch, who pushed for the strata inquiry, has branded the report a “whitewash”.

“I challenge the insurance companies to produce examples of ‘significant insurance losses’ for unit complexes and apartment blocks in Far North Queensland that would justify hikes of up to 1000%,” he told insuranceNEWS.com.au.

Mr Entsch says availability and affordability are issues, with some constituents claiming insurers are refusing to cover them at any price, based entirely on postcode rather than risk. “This crisis has now extended across the whole range of residential, rural and business insurance, too.”

The Insurance Council of Australia has welcomed the AGA’s findings.

CEO Rob Whelan says the report “supports the evidence that insurers provided to the House of Representatives… in late January, which showed insurers were readjusting their strata insurance prices to cover the underlying technical risks after many years of underpricing and rising reinsurance costs”.

The report says gross claims – relative to 2007 – rose 500% in 2008, and by 550% in 2010/11, although in the year to last June 30 claims were only 75% of the 2007 level.

The AGA suggests prices were historically too low either because insurers were trying to increase market share or because they did not understand the risk properly.

It says higher reinsurance costs cannot be blamed for the steep rise in premiums.

Far North Insurance Brokers Director Doug Olsen says profitability fell because some insurers competitively priced premiums without adequately assessing risk.

There are not enough insurers willing to write strata business in north Queensland, he says.

“A smaller number of insurers is taking on all the exposure, so they’re in an almost no-win situation if major losses occur,” he told insuranceNEWS.com.au.

“They can’t avoid them by spreading the risk, so they’re looking very carefully at their exposure to make sure they can manage it.”

Mr Olsen says it is not easy to get more insurers into the market because they are unable to take on more risk without appropriate reinsurance cover.

The AGA report says while there is limited competition in the market, “it is not clear that this has resulted in prices which are unreasonably high when assessed against the underlying risk”.