Chapter 4Challenges in the insurance market
4.1Evidence to the committee indicated that there are several factors alongside climate risk that are contributing to the rising cost and unavailability of insurance.
4.2These factors include the concentration of the Australian insurance market, rising inflation and supply chain issues, continued development in high-risk areas and the increasing cost of reinsurance. This chapter considers these factors and explores what can be done to address them.
Factors contributing to the increasing cost and unavailability of insurance
4.3In addition to the increasing severity and frequency of natural disasters contributing to the rising cost of insurance in Australia, submitters raised several factors within the insurance industry that are exacerbating this issue. These factors should be considered within a context in which insurance companies continue to post significant profits. This financial year, Insurance Australia Group Limited (IAG) posted profits of $1.42 billion, a rise of 79.1 per cent on the previous financial year while Suncorp posted a profit of $801 million, a 17 per cent increase on the previous year.
Market concentration
4.4Australia's insurance market is comprised of several major providers, with certain sectors of the market being highly concentrated with the four major insurers, the IAG, Suncorp, QBE and Allianz which made up approximately 74 per cent of the home and motor insurance market in 2017.
4.5While the market is fairly concentrated nationally, market concentration is particularly problematic in northern Australia. In 2017, the ACCC stated that insurance markets in that region were concentrated and that 'unusual market dynamics were leading to soft competition'.
4.6In particular, the ACCC found that home and contents and strata insurance markets were dominated by a small number of insurers, with only eight insurers supplying most of the home and contents and strata insurance, but through 30different brands and 119 intermediaries, thereby creating the illusion of more competition.
Rising inflation and supply chain issues
4.7The Insurance Council of Australia (ICA) told the committee that another factor contributing to the rapid increase in insurance premiums is high inflation. The ICA submitted that:
Lasting impacts of the Covid pandemic have created a challenging economic operating environment: supply chain shortages, labour market disruptions, and unprecedented demand in the construction sector have all contributed to increasing headline inflation.
4.8The ICA noted that higher inflation, particularly in the construction sector, increases the cost of repairing and rebuilding homes and is reflected in higher premiums. It drew the committee's attention to CoreLogic's Cordell Construction Cost Index which shows that building costs rose a record 11.9 per cent in 2022, far outstripping the Consumer Price Index (CPI). While construction cost inflation has since significantly reduced, deflation is unlikely to occur so costs will remain elevated.
Rising cost of reinsurance
4.9Reinsurance is insurance for insurers. It is an arrangement whereby an insurer transfers all or part of a risk to another insurer to provide protection against a particular risk. It helps insurers to manage their risks by absorbing some of their losses.
4.10Several submitters, including the major insurers, suggested that the rising cost of reinsurance globally is a contributing factor to the rising cost of insurance premiums.
4.11The Actuaries Institute submitted that the interaction with reinsurance costs, which is subject to cycles of supply and demand of capital, are a key driver of reinsurance pricing in the short term.
4.12The ICA further explained that:
… reinsurers have failed to earn their cost of capital in five years out of the last six. Reinsurers have responded accordingly by increasing reinsurance prices significantly and reducing available capacity. As a result, global reinsurance costs rose to 20-year highs last year, with Australian insurers facing cost increases of up to 30 per cent. Although reinsurance market conditions are expected to soften in 2025, the current rise in reinsurance costs is being passed on to policyholders.
Taxes on general insurance
4.13Some submitters, including the major insurance companies, the Productivity Commission, and the Actuaries Institute, pointed out that certain state taxes, including stamp duty, GST and the emergency services levy (in NSW) on general insurance contribute to the high cost of insurance premiums.
4.14Some witnesses drew particular attention to stamp duty as an inequitable and inefficient tax. For example, industry expert, Mr John Trowbridge, explained that under the current system, people who face higher risks and therefore higher premiums are required to pay more tax, which is not fair. While acknowledging that these taxes provide significant revenue to states and territories, he recommended their abolition, given the inequity. If abolition is not possible, Mr Trowbridge suggested that a fairer way of determining the tax could be to calculate it based on the total sum insured or value of land, rather than on the insurance premium.
Continued development in high-risk areas
4.15The ICA advised that continued urban development in high-risk areas is a key driver of increasing losses after a natural disaster. The ICA explained:
… as pressure to house growing populations mounts, development in high‑risk areas is increasing globally and locally… Australia has one of the world's highest urban populations, and development in high-risk areas like floodplains is increasing.
4.16In some instances, updates to flood modelling have led to re-zoning of urban areas as flood plains. Recent media reporting suggests that this was the situation confronted by the community of Kensington Banks, Melbourne earlier this year when about 9000 properties were designated as at risk of flooding as part of ‘recast’ flood mapping.
4.17In other areas, evidence to the committee suggested that construction on flood liable land continues. In the Northern Rivers, NSW the committee was told that 2022 flood affected residents were put into pod villages on a site that is '100 per cent flood liable'. Drawing on its experience with the 2022 floods and the aftermath, the Community Disaster Action Group (CDAG) called for the development of a national, science-based criteria for flood zone mapping.
4.18Associate Professor Roslyn Prinsley, Head of Disaster Solutions at the Australian National University, recommended that land use planning and policies and building codes be urgently considered to avoid building more 'shoddy houses in floodplains' and other disaster-prone areas, as this is creating a worse problem for the future.
4.19In relation to building codes, the committee is aware that Commonwealth, state and territory building ministers met in June 2024 and agreed on the inclusion of 'climate resilience' as a specific objective of the Australian Building Codes Board (ABCB) from 2025. This change was made in response to recommendations from the Royal Commission into National Natural Disaster Arrangements, and aims to give the ABCB 'a clear mandate to develop future National Construction Code (NCC) requirements that reduce the impact of natural disasters on housing and other critical community facilities'.
4.20This is a positive step and the ABCB's progress should be closely monitored.
Cash settlements and the difficulty in 'building back better'
4.21Currently, insurance companies pay to replace what has been damaged or destroyed. However, many submitters highlighted the importance of 'building back better' to enable affected households and communities to build more resilient homes and infrastructure.
4.22The committee heard that there are significant challenges associated with 'building back better' to ensure that a home damaged in a disaster is built back or retrofitted to be more resilient to future disasters.
4.23Associate Professor Prinsley expressed that, ideally, all houses should be built to a standard that is resilient to future disasters and climate change and, at the moment, that is not the case.
4.24Dr David King, from the Centre for Disaster Studies at James Cook University, stated that 'building back better' is constrained by the amount of the insurance payout that people get. He explained that:
You may have designs for better and better-quality housing and more disaster resilient housing but, if the insurer only pays for the replacement value of the building before the disaster, people are not going to be able to build back better.
4.25The committee heard that the main way households can 'build back better' is by negotiating a cash settlement from their insurer. This involves the insurer settling the claim with cash instead of taking responsibility for completing repairs themselves, thus allowing the person flexibility to 'build back better'.
4.26In relation to cash settlements, Dr Antonia Settle, author of the report 'Unsettled', commissioned by Financial Counselling Victoria, advised that financial counsellors had reported that cash settlements are the single biggest problem in insurance for the flood impacted households they were working with following the 2022 Victorian floods.
4.27Dr Settle advised that a major problem with cash settlements is information asymmetry, explaining that:
Information asymmetry is just too big for households to negotiate a fair settlement independently. They don't know enough about rebuilding. They don't know enough about the insurance contract to advocate for themselves effectively.
4.28Dr Settle warned that insurers are currently failing to support households as they 'actively discourage households from building back better' as insurance contracts entail like-for-like reinstatement that deliberately excludes betterment.
4.29This view was echoed in the Northern Rivers, where the committee was told that 'insurance companies are not allowing people to build with flood resilient materials' unless they agree to take a cash settlement.
4.30Suncorp acknowledged that contractual and regulatory constraints around insurance contracts requiring replacing 'like for like', does present complications. They advised:
You might say the logical approach is if you had the means and will and your property were impacted by an event, and your sum insured entitlement was $100,000 but you want to spend $120,000 to lift the resilience of that, the only real way to do that is probably with a cash settlement. That comes with constraints and challenges in the industry.
Insurers failing to recognise disaster mitigation and resilience efforts
4.31While mitigation and resilience measures are widely recognised as a significant part of the solution to combat the rising cost of damage caused by disasters, there is no requirement for insures to recognise mitigation efforts and provide discounts accordingly.
4.32The ICA conceded that while risk mitigation actions can be taken into account by insurers when setting premiums (and that some insurers do offer formal programs that recognise specific mitigation measures), approaches to risk mitigation are neither standardised nor comprehensive across the industry.[28]
4.33The committee heard from numerous submitters about insurance companies failing to recognise their mitigation and resilience efforts. This means that while these measures may be reducing the impact and risk associated with certain disasters, insurance premiums are not being reduced to reflect this reality.
4.34Ms Alison Smith, Chief Executive Officer of the Local Government Association of Queensland, gave two examples of this occurring in Queensland. She explained in the Murweh Shire Council, a levee was built that has prevented further flood inundations to the town of Charleville. However, despite this initiative, premiums have significantly increased for households and businesses in the region.
4.35Ms Smith also highlighted a similar circumstance in the community of Balonne, where work has been done to construct flood levees, yet premiums have risen by well over 100 per cent.
4.36The committee also heard directly from Councillor Shaun Radnedge, Mayor of Murweh Shire Council who gave further detail about what his community has experienced. He explained that Murweh Shire Council has four towns: Charleville, Augathella, Morven and Cooladdi. Charleville has 3,300 residents, and following flooding events in 1997, 2008, 2010 and 2012, the residents of Charleville have suffered increasing insurance premiums, to the point that many residents can no longer afford to insure their residences and small businesses.
4.37Councillor Radnedge advised that since these flooding events, the following significant mitigation efforts have been made:
… the construction of the 7.2 kilometre levee bank in 2011 cost $11.5 million. The construction of the flood-free residential estate cost $3 million after 1998. Local government funded grants for raising homes in flood-affected areas have had a cost of 8K per home, and 20 houses to date have been funded by council. Clearing of the Warrego River, post-1990, has been an ongoing annual program, and Bradley's Gully diversion post-2008 had a cost of 400K. The diversion of Bradley's Gully in 2014 added to our mitigation and cost $12.8 million.
4.38These efforts have been a success in mitigating flood damage, with recent floods at Charleville (recorded as the third highest flood peak since 1990 in the area), resulting in no inundation due to the mitigation works. However, insurance premiums in the area have risen above 400 per cent, despite this significant investment.
4.39The committee also heard from Community Plus Queensland and Resilient Kurilpa that improving the resilience of a property can increase the cost of insurance premiums, as the cost to replace the higher quality materials is more expensive than the cheaper, less resilience materials, and the mitigation effort is not taken into consideration.[34]
4.40In relation to this issue, Professor Paula Jarzabkowski, Professor of Strategic Management at the University of Queensland, observed that 'the link between risk mitigation and premium reduction is actually very weak'. She explained that sometimes there is very little that an individual can do to their house that will lead to a substantive reduction in the premium offered to them on that house. Additionally, some of the mitigations measures required are not within an individual's capability, for example, construction of surrounding infrastructure.
4.41The insurers indicated that pricing is a complex issue, and taking certain mitigation and resilience measure may not change the price of premiums. Suncorp explained that:
Many elements go into the pricing of risk, particularly a home or commercial risk. It's not just flood. There is bushfire, cyclone, earthquake in some states, hail, storm and storm surge. We model each one of those perils and estimate an expected loss at a risk of adversity that is built into the price of the premium. We calculate an expected loss by multiplying the probability of an event occurring times the loss when it does occur. I would also add that even if the frequency of events doesn't change, your costs could change due to things such as building costs.
4.42Nevertheless, RACQ and Allianz advised that they do make efforts to recognise mitigation and resilience efforts at the household level, where appropriate. RACQ submitted that:
RACQ recently adopted alternative approaches to how we assess risk based perils pricing, which influences the way we calculate insurance premiums. These models ensure that we calculate premiums on an individual basis that more accurately determines our members' individual level of risk. Where our view on the risk is high, members will see this reflected in their premium. However, they will also experience this model in a more favourable way, where our modelling shows the risk is lower.
4.43Similarly, Allianz told the committee that:
We have a process where, with any resilience work that's done around floods in particular, where they're able to raise a property or change a floor level—and some of this is expensive and not necessarily easy for households to do—we can provide advice prior to that work and then reflect it immediately in premiums. As I said, it's not a common activity, in terms of householders having the ability to do that, but it's one where we can tangibly demonstrate that. And sometimes that can be quite significant.
4.44While acknowledging the intentions by the above insurers to recognise mitigation and resilience efforts in their pricing, from the evidence provided to the committee on this issue, it appears that in practice, having mitigation efforts recognised is extremely difficult.
Lack of transparency in pricing insurance premiums
4.45Further adding to the complexity of pricing premiums, the committee heard that the issue is exacerbated by a lack of transparency and clarity around price increases and what they are attributed to.
4.46The Financial Rights Legal Centre (FRLC) told the committee that 'pricing in Australia for insurance is so opaque; it is such a black box. We have no visibility of it.'[40] Moreover, they have seen 'example after example of people whose insurance has doubled, tripled, quadrupled with zero explanation'.[41]
4.47Financial Counselling Australia gave examples of clients faced with this issue, including one person whose insurance jumped from $4,000 to $20,000 in one year. That customer then sought four quotes from other insurers, which all ranged between $5,000 to $8,000. After she presented those quotes to her original insurer, the amount was dropped to $10,000 over the phone as a 'gesture of goodwill'.[42]
4.48The committee heard similar experiences of people receiving vastly different quotes from different insurance companies, and sometimes even the same company, causing many to doubt the basis and legitimacy of pricing.
4.49Mr Dale Emerson of Community Disaster Action Group shared the experience of a policyholder in his community who he assisted to get flood insurance:
One of them, NRMA, said it would be $30,000 for flood insurance. I'll repeat: $30,000. Suncorp's original quote was $13,207.58, very specific. They phoned again on 1 May 2023 and they were quoted $12,703.10 because I advised them to increase their excess.
The point is that, following this, they did get an insurance quote last year for $4,000 and this year the price has gone from $4,200 last August to $6,700 this year.
4.50Following this experience, Mr Emerson aptly posed:
… there seems to be a lack of clarity and a lack of procedural policy because how can, across an industry, there be so many different prices?'
4.51The Australian Financial Complaints Authority (AFCA) told the committee that they have been receiving complaints resulting from poor quality information from insurers about why premiums have increased. In looking into some of these complaints, AFCA said that it found it difficult to get the insurer to explain the basis for the premium increase in a way that is meaningful for the consumer and AFCA decision makers. They explained that if insurers fail to provide a meaningful explanation for the increase, the consumer lacks a basis to challenge it.
4.52AFCA emphasised that 'insurers can and should do better in how they communicate about the basis for premium increases', noting that this is not a call for exhaustive explanations, rather the provision of sufficient information for a consumer to understand the factors that led to the increase and how those factors may have changed at renewal.
4.53The Local Government Association of Queensland recommended that the Australian Government require greater transparency from insurance companies regarding the methodology used in setting insurance premiums. It strongly argued in favour of a mechanism to ensure that any investment in flood mitigation undertaken by councils informs risk ratings and positively influences insurance premium pricing.
4.54In addition to the need for greater transparency and clear breakdown of the premium price, submitters explained that the risks being considered by insurance companies in pricing decisions should also be transparent.
4.55According to the ICA's website, the National Flood Information Database (NFID) is a national database containing 13.7 million properties, overlayed with the known flood risk according to government flood mapping. However, commercial licensing arrangements between governments and the specialist flood risk experts who prepare the flood maps means that the database is not accessible to the public.
4.56While the committee heard that most insurers use the NFID to assist in determining the flood risk to individual properties, supplemented by multiple other commercial and proprietary information sources, none of this critical information is available to the public.[50]
4.57Even researchers have found it difficult to obtain critical information to assist their work, with Associate Professor Prinsley submitting:
… some insurance companies won't give you the data at all, unless you're the government. Even then, it sounds like it could be a bit challenging. With others, you can buy some of the data. It's not easy to get data.[51]
4.58Associate Professor Prinsley told the committee that as increasing climate risk is such an important problem for the country 'we should be sharing all the data that everyone has to try to make sure that we can address that problem in the best possible way'.[52]
Monitoring and oversight of premium prices
4.59In relation to the insurance market, the committee understands that insurers are primarily regulated by the Australian Securities and Investments Commission (ASIC) and the Australian Prudential Regulation Agency (APRA). However, neither have a direct role in monitoring or oversighting insurance premium setting, which the committee was advised is a commercial decision for the insures themselves.
4.60Further, the Australian Competition and Consumer Commission (ACCC) has oversight over competition law in Australia, including in the insurance industry. However, while the ACCC can be tasked by governments to undertake particular oversight responsibilities—for example, the ACCC's current directive to monitor and report on the Cyclone Reinsurance Pool—the ACCC does not have a current role in price monitoring in the wider insurance market.[54]
4.61The lack of transparency in relation to premium pricing in the insurance market is compounded by a lack of oversight over premiums pricing and remains a significant issue. Several submitters recommended that steps be taken to provide greater oversight of the market alongside price transparency to address this gap.
Challenges with the strata insurance market
4.62Strata is the fastest growing form of residential property ownership in Australia. A strata title allows individual ownership of part of a property (called a lot and can include land, a townhouse, villa, duplex, or an apartment), combined with shared ownership in the remainder of the property through a legal strata structure, called owners corporations (OCs), bodies corporate, strata companies or strata corporation.
4.63The committee heard that strata insurance is compulsory in all states and territories. The Strata Community Association (Queensland) advised that while this should ensure universal coverage, in practice, aggressive risk avoidance by insurance underwriters makes it difficult for some to obtain cover at all, particularly in Far North Queensland where this is a common scenario. Consequently, this is leaving strata homeowners 'very exposed to climate related weather events'.
4.64Mr John Trowbridge agreed that it is difficult for some owners' corporations to secure insurance. He further observed that some brokers and strata managers are charging fees or commissions of over 20 per cent, which is exacerbating the cost for strata insurance.
4.65This concern was shared by the Owners Corporation Network of Australia Limited (OCN), the independent peak consumer body representing the rights and interests of residential strata and community title owners and residents. The OCN argued that intermediary fees, commissions and profits are driving up the cost of insurance even more so than climate risk, recommending that 'the ACCC or another appropriate body should investigate the growth in intermediary and distribution margins'.