Insurance affordability

Since STRIVE 1 was released, Australia’s post-pandemic economy has continued to be tested. As excess demand collided with significant supply-chain constraints, Australia’s rate of consumer price inflation rose significantly.

For everyday Australians, this meant that the price of goods and services kept rising, exceeding the rises in average earnings that have also been seen over the same period. This confluence of events from 2022 has meant that, on average, Australians are likely to be in a worse financial position than they were a year ago, with their earnings able to purchase fewer goods and services than at the same time in 2022. 

Since May 2022, the Reserve Bank of Australia (RBA) has increased interest rates thirteen times. The ‘emergency’ rates of the pandemic, designed to stimulate the economy, have been relegated to history, with the cash rate target now exceeding 4%. Australia’s Consumer Price Index (CPI) rose by 1.2% to 5.4% in the September 2023 quarter.

CPI remained lower than the 6% annual rise in the June 2023 quarter. This was also the third quarter in a row of lower annual inflation, down from its peak of 7.8% in December 2022. Nevertheless, prices continued to rise during the September quarter for fuel, rents, electricity, and insurance, however there were some offsetting falls in childcare, vegetables, and domestic holiday travel and accommodation.

For a household with a $700,000 mortgage, the cost of interest rate increases is around $1,000 more per month than it was prior to the monetary policy tightening process. Of course, there are many households, particularly those in Sydney and Melbourne, for whom these mortgage cost increases are much higher. The affordability and availability of rental accommodation also continue to outpace housing growth, triggering a Commonwealth Rent Assistance support increase of 15% on top of CPI indexation, the largest increase in 30 years.

During a time of increasing uncertainty and significant transition, consumer demand and confidence is weakening, heavily influenced by rising inflation and its impact on interest rate rises. 

Though the RBA and the government are navigating what they call the ‘narrow path’ - a reasonably timed return to target inflation in a growing economy without losing labour market gains - they remain real challenges for Australians in this economy.

Across the board, purchasing power is down, as is consumer confidence. Because borrowing costs are high, fewer households are participating in leisure activities, or renovating their homes, or building new properties. This outcome, while intended by policymakers, does also have economic costs.

When it comes to insurance, many households facing additional pressures to meet the rising costs of basic essentials are struggling to afford increasing insurance premiums. In this context, there is a risk that some families may become underinsured by not adequately covering their homes, their vehicles, or any other liabilities to manage cost of living pressures.

"Many households facing additional pressures to meet the rising costs of basic essentials are struggling to afford increasing insurance premiums."

Although supply chain itself has improved, the sustained rate of building inflation over the past twelve months may lead to consumers underestimating just how much it will cost to rebuild a damaged property or to repair a damaged vehicle - a challenge that remains in this new economic paradigm. While overall inflation has moderated over Q2 and Q3 of 2023, in general building inflation has consistently outpaced the rate of consumer price inflation.

This has led to a scenario where the price of repairing property in mid-2023 is considerably higher than doing so a year ago — and that the pace of this price increase has occurred faster than most other rising costs elsewhere in the economy. Some industry experts predict this could be as high as 20%, with obvious flow on effects to premiums.

Fortunately, many Australians have experienced a largely benign weather period during 2023, however some IAG brands are experiencing more water and fire damage claims that are not driven by natural perils. Although claims lodgement volumes are significantly lower, this leaves us more prone to large loss outliers with claims that are more expensive to fix. 

The most noticeable shift has occurred in the second-hand car market. With values now reducing as demand for second-hand vehicles softens, many insureds are now finding themselves over insured. Market data indicates total loss values are decreasing and agreed values are increasing, contributing to higher claims costs on motor policies covering these vehicles. This could be an opportunity for customers to pay less than expected on their yearly renewals (which are often rolled over) by reassessing the value of their second-hand vehicles. 

Fortunately, procurement for vehicle parts is occurring at a much faster rate than during the pandemic and its immediate aftermath. Although not back to pre-pandemic efficiencies, the time elapsed between ordering parts and repairs has reduced significantly. After seeing annual increases of 6-7% from Jan 21 through to early 2023, we have now seen labour costs plateau over the last six months. However, parts for popular vehicles such as Toyota Landcruiser and Hilux, Holden Colorado, and SUVs such as Mazda CX-5 and Toyota RAV4 have seen a higher rate of repair cost inflation than other vehicles. The overall rate of increase from 2021 – 2022 was 16% with parts for some models increasing by as much as 25%. Headlamps, bonnets, and windscreens have seen price movements well above the average, largely due to the high cost and design complexity to manufacture with LED lights, sensors, and integrated vehicle safety and driver aid systems. Concerningly, rural and regional Australia is experiencing a dwindling number of options for vehicle repairs, with many smash repairers retiring and closing shop, often without succession planning in place. For insurers, having strong assessing and smash repair relationships is essential to offering a sustainable and cost-effective provider network. As technology continues to evolve, insurers must also evolve this network to continue mitigating rising repair costs whilst delivering effective and efficient customer outcomes. 

Demand for new vehicles continues to surge, with continued growth in the automotive sector in 2023. By October 2023, new vehicle sales had increased by 22.3% on the previous year, with five consecutive months of 100k+ unit sales per month. Passenger vehicles remain popular, but SUVs continue to dominate the market with over 55% of sales attributed to this class.

This is a strong indicator of supply chain improvement with Australia reaching one million new vehicle sales in October for the first time – a significantly positive shift since the COVID era. Increasing consumer and business demand for electric vehicles is placing pressure on insurers to find a solution to accommodate this growing market segment. This is not limited to personal use, with large government entities and corporations also looking to invest in electric vehicle fleets. From a supply chain perspective, challenges are arising with electric vehicle manufacturers reluctant to provide parts to providers who are not badged repairers.

THE SURGE IN INTEREST FOR ELECTRIC VEHICLES FROM BOTH CONSUMERS AND BUSINESSES IS PUSHING INSURERS TO FIGURE OUT HOW TO MEET THE NEEDS OF THIS EXPANDING MARKET.

In some cases, customers are expected to pay up-front for repair costs before reimbursement by their insurer, creating additional frustrations and delays with the claims process. 

Scarcity of labour in the production of essential materials has led to increased costs, broadly characterised as inflation. During 2022, input prices to housing construction rose 4.4% overall, but remained consistently steady with 0.0% change in the September quarter. This followed sixteen consecutive quarterly price rises since December 2019 which saw construction costs peak at the height of the pandemic. While the residential construction sector now maintains a steady level of activity, suppliers have resorted to offering discounts on products used in earlier construction phases (such as paints) to stay competitive in a constrained market. Furthermore, the recent surge in energy prices is further amplifying manufacturing costs for bricks and tiles. Reassuringly, any significant pricing changes have been offset by improved supply conditions for structural timber and easing demand from China for steel.

From a claims supply chain perspective, longer claims periods and higher settlement costs are a direct result of these inflationary and supply chain influences. These costs are often too late to be fully recognised in an insurers’ premium, leading to potential future increases by insurers. This is a pricing tail that is yet to be fully costed into insurance premiums. This, too, creates a risk that households become inadvertently underinsured, although this risk can be curtailed by calculators (such as Cordell’s Sums Insured Calculator) that factor in inflation.