Understanding the drivers of higher insurance premiums - reinsurance market spotlight

Throughout 2023, many Australian insurance customers have been confronted by ‘bill-shock’, when renewal costs exceeded their expectations. Since June 2022, insurance costs have increased due to a confluence of factors, including an increase in natural peril threats, building inflation, higher reinsurance costs, and a tightening labour market.

Many consumers are not aware that insurance price increases may be driven by external, global forces, as well as the underlying risk profile of the Australian and New Zealand insurance market.

Reinsurance is an essential component of the insurance industry. Insurance companies take out reinsurance policies to protect themselves and their shareholders from catastrophic losses, just as consumers of insurance products take out insurance themselves. But just like consumer insurance products, the price of reinsurance is intrinsically tied to underlying risks associated with the peril being (re) insured against.

“Reinsurers responded to the increase in natural peril losses and economic conditions that have affected us here in Australia and New Zealand, and across the globe. This led to a hardening of the reinsurance market which means reinsurers are charging more for the protection they sell insurers.”

- Emma Hill, Executive Manager, Placement & Underwriting, IAG Group Reinsurance

The price of catastrophe reinsurance has risen, due to the increase in recent years in (re)insured losses, occurring both in Australia, and globally. 

This, combined with other economic pressures such as high inflation and poor investment returns, has led to an increase in pricing as reinsurers seek to improve returns.

“One thing that has impacted us significantly was natural perils and reinsurance costs. We have seen very large increases in natural peril and reinsurance costs in recent times, and it appears to be a common trend in the market. Consideration and allowance need to be made for this as we assess and price for the risks we underwrite.”

– Amy Huen, Executive Manager, Intermediated Insurance Australia (IIA) Pricing

STRIVE I described 2022 as a year of disruption, much of which was attributed to natural peril events. Throughout 2022, major flooding events affected much of the east coast of Australia. Additionally, regular rain and hail events saw an increase in insurance claims. The weather events of 2022 came after two years of pandemic related disruption, which was itself preceded by the 2019/20 Black Summer bushfires.

According to the Actuaries Institute of Australia, home insurance premiums rose by 28% industry-wide to an average premium of $1,894 in March 2023. Unsurprisingly, high-risk properties (such as those in flood-prone areas) attracted the highest increases, by as much as 50%.

According to the Actuaries Institute, the flow-on effects on premiums from the devastating 2022 East Coast floods have impacted the policies of approximately 171,000 households located in Southern QLD and Northern Rivers NSW to the tune of $1.5 billion per annum or $8,800 average premium per household. 

Insurance affordability stress is a real concern for many Australians. The Home Insurance Affordability Update assessed that 12% of households are considered to be under affordability stress (determined when the annual cost of home insurance exceeds four weeks of gross household income). The estimated home insurance premium for those 12% of Australian households is $3.6 billion, representing a potentially large ‘protection gap’ for those affordability-stressed households, which either do not purchase adequate home insurance and are therefore underinsured, or not insured. 

This is of considerable concern with government and policymakers being called upon to explore short, medium, and long-term funding packages and other measures to reduce insurance affordability stress, such as the June 2022 Cyclone Reinsurance pool and (in extreme cases) community relocations.

Cyclone reinsurance pool illustrative of government interventions 

In July 2022, the Australian government established the Cyclone Reinsurance Pool. The Cyclone Reinsurance Pool is a reinsurance arrangement between insurers and the Australian Reinsurance Pool Corporation (ARPC). The Pool operates Australia wide and covers cyclones and cyclone-related flood damage. The Pool is intended to make insurance more affordable for eligible home and contents, residential strata, landlord policies and commercial property with maximum sum insured less than or equal to $5 million. 

This is a window into the types of government interventions that are being implemented to mitigate against escalating insurance costs.

Additional government interventions 

Both NSW and QLD state governments have acted by setting up home resilience funds such as the Northern Rivers Resilient Homes Fund in 2022 and the QLD Resilient Homes Fund. The latter provided $741 million in combined funding from the Australian and QLD governments to deliver three programs: Resilient Retrofit Program, Home Raising Program, and Voluntary Buy-Back program for eligible properties. In addition, improved data, and technology usage such as that provided by the Queensland Reconstruction Authority is contributing $6m towards more accurate surveys that better map flood terrain to mitigate risk factors for future weather events. 

Figure 3.2 illustrates the extent to which household insurance claims have risen in recent years in Australia. Over $10.3 billion in claim payments were made to householders in 2022 — exceeding even the disastrous 2019/20 bushfires. 

Increased Australian risk profile inflating reinsurance costs 

Both the increasing risks of natural perils and price pressures exacerbated by building inflation have contributed towards Australia’s changing risk profile for reinsurers internationally. Although not the only driver for increased insurance costs, the unavoidable consequence is that insurance companies across the globe are negotiating much higher reinsurance rates than in previous years. 

Inevitably, these costs flow into consumer insurance premiums. In an ongoing environment of economic change and climate unpredictability, it is difficult to project what impacts may be felt in future reinsurance programs. But the ongoing pressure on consumers to adjust to a new normal of increased insurance premiums to adequately protect their risks looks likely to remain for the foreseeable future.