Research: Better measures needed to understand insurance affordability

Research: Better measures needed to understand insurance affordability

By November 30, 2020News

A new paper published today shows that many households face affordability pressure in northern Australia and increased data and measures can help to better respond to this challenge.

Households in up to 12% of Australian postcodes may face pressure meeting annual home insurance premiums, a figure which represents around 7% of Australia’s population, according the research.

The paper points to a number of guiding principles for change

The paper, published by the Actuaries Institute of Australia titled Property Insurance Affordability: Challenges and Potential Solutions, was led by Finity's climate leader Rade Musulin and aims to help policymakers better understand affordability issues.

Australia has a sophisticated approach to pricing risk for natural disasters, which is reflected in premiums that can vary from less than $1,000 a year to above $10,000. But there is no clear and widely accepted measure for whether insurance is affordable, and data is lacking to gauge the depth of the problem. Without a measure of affordability and better publicly available data, it is difficult to target relief to those who need it.

Policymakers are looking for better ways ahead, as evidenced by the Australian Competition and Consumer Commission inquiry and the Royal Commission into natural disasters. State of the Climate 2020, a CSIRO and Bureau of Meteorology report released earlier this month, adds a further contextual imperative.

Property Insurance Affordability: Challenges and Potential Solutions, written by the General Insurance Affordability Working Group, which is Chaired by Finity’s climate expert Rade Musulin, has found that a consumer’s ability to pay for insurance is not always linked to their risk: a home built on a susceptible wind-swept beachfront, subject to tidal inundation, may be high risk, but the owners may be prepared for and able to afford significant insurance premiums. But “… unfortunately, some homes in the highest risk areas tend to be in lower socio-economic groups; understandably they may not buy insurance”, said Rade Musulin, Chair of the Working Group and lead author of the report. Building codes, community resilience, changing climate and land use planning are all relevant factors. Building codes to date have focused on life safety and the current view of risk. However, a revision of codes may take years.

Guiding principles for change include:
• proper incentives for mitigation to lower overall losses over time;
• well-functioning private insurance markets which limit government intervention are desirable in an economy such as Australia’s; and
• risk-based pricing to support long-term policy goals.

Addressing affordability should include targeting the vulnerable, sending the correct economic signals to consumers and identifying what changes in behaviour are needed.

“There are complex trade-offs to be considered as part of solving problems of affordability. This paper aims to further the discussion around those issues,” Mr Musulin said.

Read more about Finity’s climate risk practice area.