Liberal Senators' Additional Comments

Foreword

1.1The view of Liberal Senators on the recommendations is as follows:

Agree with recommendations 1, 3, 4 and 7.

Agree in principle recommendations 2 and 6.

Do not agree to recommendation 5 at this time. A further, comprehensive investigation of the economic and social benefits and disadvantages of broadening the reinsurance pool is required.

Do not agree with recommendation 8.

1.2We thank the Chair, Deputy Chair and all members of the committee for their collegiality throughout the inquiry. The comments of Liberal Senators reflect our view on the evidence and is no reflection on the conduct of the inquiry, or the views of our colleagues. We thank the Chair and Deputy Chair for their leadership of this important Select Committee inquiry.

1.3We join the Committee in thanking all witnesses and submitters who participated in the inquiry. Our particular thanks go to those who gave direct evidence of their lived experience of recent natural disasters in Australia, and its ongoing impact on their lives.

Introduction

1.4Natural disasters are a feature of life in Australia. Insurance plays an important role in managing the risks of these natural disasters, and climate risk is having an impact on insurance premiums in Australia.

1.5According to data commissioned by the Insurance Council of Australia (ICA), eight of the top 20 most expensive natural disaster events, normalised to 2022/23 levels, have occurred since the year 2000, with six of those eight occurring since 2010 (inclusive).[1]Each of these disasters represents real impacts on Australians and their communities, and the difficult reality of dealing with the aftermath of natural disasters.

1.6The evidence before the committee is that natural disaster risk associated with climate change is increasing, and likely to continue to do so. The increasing frequency and severity of natural disasters will inevitably lead to increased pressure on insurance.

Purpose of Insurance

1.7Insurance serves a dual purpose, as the Productivity Commission made clear in its submission. It provides financial cover against risk for households and individuals. Through its price, it also sends an important market signal about the likelihood of that risk.[2]

1.8This dual purpose of insurance must be kept in mind, and any public intervention into the insurance market must be aware of distorting this second purpose and creating a hazard through that distortion. As the Productivity Commission explained, intervention in the market can – unintentionally or otherwise – result in ‘subsidising the movement of individuals, households and businesses into harm’s way’. [3]

1.9Similar evidence was provided by the Actuaries Institute, who noted:

Government interventions have to be very carefully considered. We have seen, globally, where sometimes it has gone wrong. The first thing is that you don't want a government intervention that encourages property development in flood-prone areas. We need to draw a line in the sand. You need to have appropriate building codes. You can't have a system that masks those underlying risks, and it has to be used effectively to reduce risk.[4]

1.10Liberal Senators are concerned that a focus only or substantially on the ‘reduction of financial impacts of disaster’ carries with it the risk of putting or leaving more Australians in areas highly exposed to natural hazards, ultimately increasing the financial cost and emotional trauma and impact of natural disasters.

Pressures on Premiums

1.11The committee heard evidence that insurance premiums reflect many factors, not only increased climate risk. In their submission, the ICA highlighted four key factors contributing to the recent rise in premiums: the impact of extreme weather events, growing asset values in high-risk areas, higher inflation and rising global reinsurance premiums.[5]

1.12Another factor raised in evidence was the increased granularity of risk assessments to individual postcodes and properties, aided by better data. Whilst some homes and locations have benefited from this, it has lessened the ‘pooling’ and therefore cross-subsidisation of risk.

1.13High inflation has played a role. The ICA highlighted that higher inflation, particularly in the construction sector, has led to increased costs for and rebuilding homes, resulting in higher premiums.[6] With high inflation in Australia over the past few years and the effect this has had on insurance premiums, one consequence is that households which are experiencing home insurance affordability stress has risen from 10 per cent in March 2022 to 15 per cent in March 2024, according to the Actuaries Institute.[7]

1.14Australian insurance providers use re-insurers to cover their risk. This is the standard practice across the world. The re-insurance cost is part of the cost base of Australian insurers. The re-insurance market is global in nature, and has seen significant price rises in recent years, the result of a high number of payouts. The ICA noted that reinsurance costs rose to a 20-year high in 2023, with Australian insurers seeing costs increase up to 30 per cent. Whilst they expect the reinsurance market to soften in 2025, the increased costs of re-insurance have been passed on to Australian policy holders.[8]

1.15Climate change does play a role in increasing premiums. As the ICA noted: ‘as risk from extreme weather worsens, so do pressures on insurance affordability in risk-exposed areas of Australia’.[9]But this is only one part of the picture. Evidence from Suncorp Group indicated that in terms of the recent annual impact on premiums, the higher risk profile created by climate change accounted for less than 1 per cent of price increases.[10]

1.16Allianz provided similar evidence, noting that an ‘insurance premium reflects the likelihood and cost of claims from different causes during the period of cover’.[11]They went on to say that longer-term climate risk is not included in the pricing of their products, which are priced on an annual basis for the year ahead only, and premiums are set based on historical claims experience and the potential costs of extreme weather events.[12]

1.17Liberal Senators note that, whilst climate risks are expected to increase over time, the factors involved in the recent rising cost of insurance premiums are more complicated. Insurance premiums are set on an annual basis and do not generally reflect future risk. Most of the recent growth in premiums is more attributable to market forces, whilst climate change presents a future risk to insurance pricing.

1.18Liberal Senators do support in principle the calls from witnesses for there to be greater transparency in how insurers are calculating price increases, and the drivers of price increases on insurance renewals. Transparency around pricing will be a useful tool to customers seeking to better understand their risk profile, and options available to them for ongoing insurance.

General Taxes on Insurance Premiums

1.19In addition to increased and sustained pressures on insurance premiums in recent years the committee heard clear evidence that taxes and levies add considerably to the cost of home insurance policies.[13] As the price of premiums has risen, so too has the tax charge on them (being levied as a percentage of the base premium), putting considerable pressure on the affordability of premiums. These taxes are considered both inefficient and are in many instances regressive in nature.[14]

1.20The Actuaries Institute notes that, in New South Wales for example, the mean home insurance premium is $2,946, of which $855 (or 29 per cent) is stamp duty, levies and GST. (Noting that NSW is the only state to levy an Emergency Services Levy on home insurance at 17.5 per cent) On the national mean premium of $2,774, general taxes account for $582 or 20 per cent of the premium price.[15]

1.21The below table from the Actuaries Institute’s Home Insurance Affordability and Home Loans at Risk – August 2024’ report and shows the breakdown of mean insurance premiums across Australian jurisdictions.[16]

1.22Liberal Senators agree with the committee that general taxes on insurance including stamp duty should be removed from insurance products, noting these taxes are the responsibility of the states. It is further noted that there are a number or reviews and reports from other inquiries that have made substantially the same recommendation.

Flood insurance

1.23As a home is the most valuable asset many Australians will own, it is reasonable to expect homeowners will insure this asset. At the macro level, home insurance in Australia remains affordable relative to the value of the asset, even though there is quite a wide variation in average price by jurisdiction (see table above from the Actuaries Institute).

1.24At the micro level, however, there is wide variation, with some locations and neighbourhoods facing premiums that make insurance so prohibitive in price to be unaffordable. This is especially true for flood insurance in areas prone to flooding, such as in Ballina and Lismore.

1.25It is important to acknowledge that flood insurance remains a relatively recent product in Australia. Allianz’s evidence was that they started rolling out flood insurance in home insurance in 2012.[17]This followed the 2011 Brisbane floods in which ‘virtually no-one’ had flood cover. Evidence from Mr Trowbridge indicates Suncorp began offering flood insurance only in 2008, with most other insurers following after 2011.[18]

1.26Whilst the evidence did point to some insurers failing to consider flood mitigation efforts in setting premiums, there is no evidence before the committee that the premium pricing for homes potentially affected by flooding is not broadly set in recognition of the potential risks.

Reinsurance Pool

1.27The Productivity Commission has warned of the risks associated with the subsidy of insurance premiums.One of the many consequences identified by the Commission that especially concerned Liberal Senators, was the possible distortion of insurance pricing which encouraged people to move to high-risk areas.

1.28There were submissions that viewed the impact of the Cyclone Reinsurance Pool on insurance premiums favourably. The Productivity Commission recommended the pool be phased out.

1.29The Senators recommend that a comprehensive analysis of the effectiveness of the Pool be undertaken to determine whether its retention, expansion or phase out is the best policy response, having regard to ensuring affordable household and business insurance, as well as the potential consequences of price distortions in the insurance market.

Insurance Profits

1.30There was no substantive evidence presented to the committee that insurers are taking in excessive profits off the back of increasing premiums. The ICA noted that ‘APRA has calculated that insurers have lost $640 million over the last 5 years from home insurance’.[19] The ICA gave further evidence that rising premiums were not contributing to profit, indicated that for every $1 in premiums on home and contents insurance, insurers pay out $1.04 in claims.[20]

1.31In their submission, APRA notes that in each of the four financial years 2020-2023, the average insurers combined operation ratio exceeded 100 per cent, indicating they had made a loss.[21]

1.32Insurance Australia Group Limited (IAG) gave evidence that for them home insurance had been unprofitable, and itself was consistently above 100 per cent combined operating ratio. They went on to state that other profitable parts of IAG’s insurance business are effectively supporting their unprofitable home insurance business. For every $100 in premiums paid to IAG, they are paying $107 in claims and costs.[22]

1.33Any suggestion that major insurers in Australia are inflating profits through higher home insurance premiums on customers is not supported by the evidence presented to the committee.

Mitigation and Disaster Readiness

1.34As damage from many natural disasters is spread across communities, and rarely experienced by just one individual, mitigation is best performed at a community level where possible.

1.35Community level mitigation is a more effective and economical way to reduce risk, particularly where Governments are bearing the funding burden.

1.36Liberal Senators placed weight on the evidence which recommends that a suite of solutions is required, with collaboration across multiple stakeholders to ensure community climate adaption and resilience. As noted by the Productivity Commission, the management of natural disaster risk ‘is a shared responsibility between households, businesses, community and government’.[23]

1.37The Disaster Ready Fund (DRF), established by the Liberal Government in 2019 as the Emergency Response Fund, is a critical lever at the Government’s disposal to support mitigation and disaster resilience across the country. At present, $200 million is allocated to the DRF each year.

1.38On 25 October 2024, the Government released the final report of the Independent Review of Commonwealth Disaster Funding (the Colvin Report). Whilst not considered in detail here, it is noted that the report recommends reform of the DRF which is ‘hampered by accessibility and administrative limitations.’[24] The report further recommends that ’The DRF should be underpinned by an investment strategy that is informed by the Risk Profile’, in addition to recommending an increase to the amount of funding allocated to the DRF.

1.39It is the view of Liberal Senators that, whilst further funding the Disaster Ready Fund may well be necessary, it is critical to ensure existing funding is being used effectively. The first priority of the fund must be to support measures that maximise real mitigation, risk reduction and resilience in at-risk communities.

1.40Whilst not expressing a view on the Colvin Report or its recommendations, Liberal Senators would support the prioritising of reforms to the DRF, before new funding is considered.

Land-use and planning

1.41It is well established through evidence to this inquiry, and to other inquiries, that land-use and planning laws are critical to ensuring areas at high risk of natural disaster impacts are not used for new development across the country. Whilst changing land-use and planning laws is in the domain of the states and territories, it is critical that preventing future development in high-risk areas is pursued as a matter of priority.

1.42In addition, consideration should be given to developing an ongoing resilient homes program to move people out of high-risk areas.

Coal and gas levy

1.43The committee’s report suggests the ‘Vermont model’ for requiring fossil fuel companies to pay the costs of damages associated with their emissions was drawn to the committee’s attention by submitters. It is noted that the subject of a levy was only raised in one single submission to the inquiry.

1.44Witnesses at hearings were invited to comment on the ‘Vermont model’ and the idea of a levy, and while in many cases offered support, this is not sufficient evidence to justify the committee’s recommendation.

1.45Liberal Senators oppose in principle the idea of a levy of this kind because the cost will likely be passed on to consumers through the higher costs of goods and services. Any review of the taxation of fossil fuel companies should be of a broader examination of Australia’s taxation system as to whether it will play a key role in the transition to a carbon neutral future or arrest biodiversity loss.

Conclusion

1.46While Liberal Senators recognise that in many cases, insurance premiums have been rising and rising fast, there is not the evidence to support wholesale interventions into the insurance market. At a macro level, the insurance market continues to function as it should. Particularly noting evidence about the core purposes of insurance, the insurance market is sending signals through its premiums about risks and reducing the financial impacts of natural disasters.

1.47This is not to say that the insurance market is not without issues. In particular on the issues of transparency around premiums and the causes of price increases, and recognition of mitigation efforts in the price of premiums are issues on which the insurance industry should seek to improve upon.

1.48Insurance affordability is a complex problem, but it is a real problem for too many Australian household. Insurers need to be more open transparent with their customers to ensure that they understand the risks to their property, understand whether an insurer considers the risk to be increasing and why, and what options are available to mitigate risks at an individual and community level.

1.49Climate change and the subsequent increasing risk of increasing natural disasters to Australian communities is a real threat to the affordability of insurance into the future. Measures that insurers and governments can implement now to increase awareness amongst consumers about their risk exposure on their homes are welcomed.

Footnotes

[1]Insurance Council of Australia, ICA Historical Catastrophe list, September 2024, insurancecouncil.com.au/wp-content/uploads/2024/10/ICA-Historical-Normalised-Catastrophe-September-2024.xlsx (accesses 25 November 2024).

[2]Productivity Commission, Submission 10, p. 8.

[3]Productivity Commission, Submission 10, p. 8.

[4]Ms Elayne Grace, Chief Executive Officer, Actuaries Institute, Committee Hansard, 20 September 2024, p. 20.

[5]Insurance Council of Australia, Submission 2, p. 3.

[6]Insurance Council of Australia, Submission 2, p. 3.

[7]Actuaries Institute, Home Insurance Affordability and Home Loans at Risk Report, August 2024, p. 4.

[8]Insurance Council of Australia, Submission 2, p. 3.

[9]Insurance Council of Australia, Submission 2, p. 2.

[10]Dr Rhys Whitley, Scientific Specialist, Suncorp Group, Committee Hansard, 9 August 2024, p. 20.

[11]Allianz Australia Insurance Lt, Submission 39, p. 2.

[12]Allianz Australia Insurance Lt, Submission 39, p. 3.

[13]Mr Tyrone Shandiman, Chair, Australian Consumers Insurance Lobby, Committee Hansard, 20 September 2024, p. 26.

[14]Insurance Council of Australia, Submission 2, p. 4.

[15]Actuaries Institute, Home Insurance Affordability and Home Loans at Risk Report, August 2024, p. 9.

[16]Actuaries Institute, Home Insurance Affordability and Home Loans at Risk Report, August 2024, p. 9.

[17]Mr Nicholas Scofield, Chief Corporate Affairs Officer, Allianz Australia, Committee Hansard, 20September 2024, p. 46.

[18]Mr John Trowbridge, personal capacity, Committee Hansard, 20 September 2024, p. 31.

[19]Ms Kylie Macfarlane, Chief Operating Officer, Insurance Council of Australia, Committee Hansard, 1 October 2024, p. 22.

[20]Ms Kylie Macfarlane, Chief Operating Officer, Insurance Council of Australia, Committee Hansard, 1 October 2024, p. 22.

[21]Australian Prudential Regulation Authority, Submission 15, p. 5.

[22]Mr George Karagiannakis, Executive Manager, Government and Industry Affairs, Insurance Australia Group Limited, Committee Hansard, 20 September 2024, p. 40.

[23]Productivity Commission, Submission 10, p. 3.

[24]Mr Andrew Colvin AO APM, Deloitte Touche Tohmatsu, Independent Review into Commonwealth Disaster Funding Final Report, October 2024 p. 20.