S&P Global webinar: Australia faces insurance affordability challenge

➤ Improving property insurance affordability in Australia will be an uphill battle, given the evolving risk environment.

➤ The government may be pressured to intervene in light of the upcoming federal elections, but there are concerns about the moral hazard risk associated with related schemes.

➤ Underinsurance does not pose a significant concern for the insurance and banking industries, but customers will likely bear the brunt of the impact.

Improving property insurance affordability in Australia is a challenge as insurance companies are compelled to pass on rising costs to policyholders in response to an evolving risk environment, according to an S&P Global Ratings webinar.

Insurers must adjust premiums in response to increasing claims costs, particularly in areas prone to natural disasters, Michael Vine, director of insurance ratings at S&P Global Ratings, said.

As premiums rise, many homeowners may opt to reduce their coverage or forgo insurance altogether, which could only exacerbate the deterioration of insurance affordability and lead to underinsurance, according to Vine. The lag in wage growth compared with premium growth has also contributed to the issue.

Most of the impact will likely fall on customers as the insurance industry is deemed resilient, with Vine noting that good risk selection and prudent risk pricing will support profitability. The main risks facing the industry include loss of premiums from lapses and managing community expectations for insurance availability and affordability, he said.

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Probable government intervention

An easy solution to improving insurance affordability is unlikely as several factors conspire to keep premiums high, Angela Zhou, senior analyst for insurance ratings at Ratings, said during the webinar.

Zhou expects the Australian government to intervene with initiatives and schemes to improve the availability and affordability of insurance. The analyst believes the government may face pressure to assist with underwriting or guaranteeing insurance coverage in high-risk areas, especially given the ongoing cost of living crisis and the upcoming elections.

The analyst noted that the Australian government's cyclone reinsurance pool has improved insurance affordability in certain cyclone-prone regions. However, while government schemes are gaining popularity worldwide, the analyst warned of the moral hazard risk they carry.

"Government schemes can create a false sense of protection by deviating from the risk-based price," Zhou said. "The underlying risks of living in a high-risk location get masked."

Another way the government could address the issue is by removing both the insurance duties and the goods and services tax. Zhou said abolishing these would lower premiums by more than 20%.

Zhou also noted that governments at all levels continue to invest in prevention and mitigation, but these measures do not negate the underlying risk.

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Low risk for banks

Underinsured properties could pose a challenge to Australian banks due to the lack of ongoing monitoring of their insurance status, Lisa Barrett, director of financial institutions ratings at Ratings, said.

Banks cannot easily verify homeowners' insurance status without direct requests, as there are no established agreements for sharing information with insurers. To manage the risks associated with underinsurance, some banks remind customers about the need for adequate insurance through their annual mortgage statements, while others avoid lending in high-risk postcodes. Ultimately, however, the borrowers remain responsible for maintaining their insurance, according to Barrett.

Despite these concerns, the overall risk of underinsurance is relatively low for the banking industry, according to the director.

"The banks are aware that it is a risk and are doing what they can to manage it," Barrett said.