Insurance Issues Simmering

Noted it an recent report last month from FNArena: Insurers Grapple With Costs And Competition

Morgan Stanley also has feedback from reinsurers that signals loss-making Australia is a global issue, asserting investors may be disappointed by the domestic insurers, which have consistently exceeded catastrophe budgets in recent years, despite no impact from cyclones, and this could lead to a de-rating.

This week a post at The Conversation: A national insurance crisis looms. The Morrison government’s $10 billion ‘pool’ plan won’t fix it

Higher payouts by insurers means higher insurance premiums for households. The average home insurance premium for all Australians now costs almost four times as much as it did in 2004, according to Insurance Council of Australia data. These patterns are only going to intensify.

Our research indicates many more households will drop their insurance coverage than experts have previously anticipated. Those who decide premiums are no longer worth the money are more likely to be lower-risk customers. With a smaller pool of customers who are higher risk, insurers push premiums up further, prompting yet more households to opt out. This Fewer vicious circle will accelerate as costs climb with greater impacts from climate change.

So an insurance and social crisis looms, with financially devastating consequences for the uninsured.

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So what can policy makers do? One option would be for the government to directly subsidise households’ insurance costs, similar to how it subsidises child-care costs.

The federal government has instead opted for an indirect subsidy, by stepping into the “reinsurance” market. Reinsurers are like wholesalers, providing insurance to retail insurance companies. By providing reinsurance at a cheaper cost than commercial reinsurers, the government can bring household premiums down.

The downside is it exposes the government to the risk of huge costs when insurers draw on that reinsurance to pay out households in the event of a disaster. That risk will rise as the climate warms. So in the long run it simply shifts risks and costs to the public purse.

The idea of a government providing a reinsurance pool has been rejected by the industry, regulators and consumer groups because it exposes the government to potentially massive costs without having any impact on the root of the problem.

I’m not sure I’m aware of any consumer groups who have rejected the reinsurance pool proposal for North Queensland. ACCC preference was for direct subsidy over a reinsurance scheme, with mitigation.

Previous post: ACCC Insurance Report

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