Property Insurance Affordability: Challenges and Potential Solutions

Affordability of property insurance is a complex issue that remains a challenge for many stakeholders, notwithstanding numerous inquiries over at least the past decade. The ACCC’s three-year Northern Australia Insurance Inquiry is the latest and about to wrap up with the final report to be delivered to the Treasurer.

It is against this backdrop, with an overlay of a longer-term overall increase in climate‑related risks, that this latest Actuaries Institute Research Paper, Property Insurance Affordability: Challenges and Potential Solutions, has been launched.

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Read the transcript

Illustrative mapping of premiums by postcode undertaken by the General Insurance Working Group who authored the paper indicates about 12% of Australian households experience medium to high affordability pressure for home buildings and contents insurance. This is defined as the cost of the premium being equivalent to 4‑6 weeks or more of annual household disposable income. When affordability pressure exists, there is a greater likelihood of non or under-insurance, giving rise to a ‘protection gap’. These 12% of households are mainly located across Northern Australia.

There are many drivers of affordability, and it is acknowledged only some of these are captured by the metric used in this paper. For example, the percentage change in annual premium can also cause affordability pressure if it outside the usual bounds of what a household’s budget can tolerate. Also, the perceived value of insurance affects affordability – sometimes households only understand the value of their insurance policy and the dimensions of cover they have selected post-event.

Rade Musulin, chair of the Working Group and Principal at Finity Consulting, observes that, “Given that Australia faces significant natural peril risk, the current situation of a robust private market using address level technology is going to push pricing to risk-based levels, absent some government intervention, which will create pockets of affordability pressure. While mitigation can overcome some of that, it can only do so in the long run. And if we want to address affordability in the short term, there will need to be some sort of government intervention.”

This illustrative mapping can be put to powerful effect to help identify what granular level interventions will likely be most effective. As Kate Lyons, a member of the working group and executive manager at Suncorp, notes, “when you look at those regions, you can tell, is it a retrofitting solution required here for individual households or is it community infrastructure, levees and dams and a range of different tools to manage flood risk? It’s through understanding the high areas and getting localised solutions that we could probably get better impacts.”

The suite of potential interventions explored in the paper is deliberately comprehensive and agnostic about which potential solution(s) should be implemented. A key objective of the working group was to ensure the paper can provide a foundation for a well-informed discussion of how affordability pressures can be addressed most effectively. This recognises there are many stakeholders, including households, communities, governments, insurers, regulators, the building and real estate industry, and even charitable organisations who are called upon in times of loss.

A global survey of insurance and reinsurance pools is provided, along with observations of what is best practice.

An extensive discussion of the many other methods to alleviate affordability pressure spans risk mitigation investments, ways in which insurance policies and premiums could be redesigned, and direct intervention (as subsidies, concessions and rebates or regulatory involvement).

Rade summarises three ways he hopes this paper assists public policymakers.

“In no particular order of importance, first I think we need to focus on building codes and land use policies to reduce risk in a cost-effective manner, particularly in light of climate change. Second, we need better information on affordability, including a way to measure it consistently. And finally, we need to establish what our public policy priorities are with respect to affordability, what the standards should be, and then choose measures from the public policy toolbox to achieve those goals.”

This last reference gets to the heart of the challenge of solving affordability and which the working group articulate in the paper as, “Almost every method to address affordability involves some distribution of cost across space [geographically] and/or time to reduce affordability pressure for some subsets of the population today”. This paper provides stakeholders with evidence and questions to deliberate as they solve for ‘what is the most equitable and effective distribution of those costs?’

Kate adds, “encouraging the measurement of affordability pressure over time is important. We’re all very aware of the COVID-driven recession and the impact that it may be having. But we’re also aware of some of the financial stimulus that needs to be spent right now. And building stimulus could be really beneficial to creating jobs and economic growth and improving the resilience. So, I think if this measurement can help identify where to spend money to have the best impact, that would be really promising.”

Members of the Working Group are: Rade Musulin (Chair), Mathew Ayoub, Stephen Bell, David Chan, Simone Collins, Alison Drill, Akalya Jatheendran, Cindy Lau, Kate Lyons, Niranjan Neelakantan and Will Turvey.

The Paper, podcast and media release are available.

CPD: Actuaries Institute Members can claim two CPD points for every podcast listened to.

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