The Australian Government initiative
On 9 May 2014 the Government released a Discussion Paper titled Addressing the high cost of home and strata title insurance in North Queensland. The Discussion Paper raised options to address the affordability of home building insurance and home contents insurance in North Queensland.
Following public consultation on the Discussion Paper, the Government announced in a Media Release on 23 October 2014 that '… the Government will establish a comparison website to help consumers to compare home building and home contents insurance products' for properties located in North Queensland.
North Queensland - the high cost of home insurance
North Queensland has a history of devastating natural disasters including cyclones and floods. Some of the more significant events affecting the region include Tropical Cyclone Larry (2006), the Mackay floods (2008), Tropical Cyclone Yasi (2011), the floods of Tropical Cyclone Oswald (2013), Tropical Cyclone Ita (2014) and Cyclone Marcia (2015).
Since Cyclone Larry, the destructiveness of these events has increased, resulting in significant losses as outlined in the Australian Government Actuary (AGA) Report of 2014 (source: Australian Government Actuary, 2014, 'Report on home and contents insurance prices in North Queensland').
This report led the AGA to conclude that 'in my view, the estimated cost of cyclone risk is likely to be the main reason why North Queensland premium rates are, on average, significantly higher than premium rates in most other parts of Australia' (source: AGA Report 2014, paragraph 9.5).
This website aims to help you to be more aware of the variety of home insurance policies and range of premiums available.
Factors that affect premiums
Home insurance is a way for you to transfer the risk of loss or damage to your property or belongings, to insurance companies (insurers) in exchange for you paying them a premium.
Due to the large number of current and potential policyholders, and to ensure that they have enough capital to take on these risks, insurers use statistics to predict the cost to their business of claims being made. Each insurer will have a different method of calculating and predicting risk and therefore might charge different premiums for the same risk.
When determining how much to charge you for your home insurance premiums, your insurer might take into account a number of factors that could include:
- The extent or level of the cover you've selected under your policy (such as the types of risks that are or are not covered (flood, storm, fire and explosion etc), and the benefits, features or limits of cover offered).
- The amount of the excess you agree to pay towards each claim that you make. The higher the excess amount you choose, the less you will pay in premiums.
- The likelihood that you will make a claim and how much that claim will cost.
- The insurer's business costs or expenses (including claims administration expenses).
- Government taxes and charges.
- The insurer's pricing strategy and target profit margin. These strategies are commercial decisions for insurers and broadly encompass a range of approaches to pricing that may be implemented to achieve the insurer's overall business objectives. For example, offering loyalty or membership discounts and bonuses may be a pricing strategy that an insurer implements to assist in retaining key customers.
From an insurer's perspective, the likelihood that you will make a claim and how much that claim will cost may depend on a number of other factors, such as:
- Your claims history – what you've claimed for in the past and how often you claim are factors that some insurers use to rate your likelihood of claiming for similar events again.
- The history and cost of natural disasters occurring in an area that includes your property – North Queensland is particularly vulnerable to cyclones and floods that have had devastating impacts on properties and have resulted in significant losses. The more frequent and devastating natural disasters in your area are, the more likely an insurer may think similar disasters are likely to occur again, resulting in similar devastating losses that you and ultimately your insurer will have to incur.
- Recent technological advances (for example, those that have allowed insurers to better map flood risk) have helped to increase the accuracy of your insurer's calculation of this risk factor. However, this also means that risk assessments are increasingly being conducted by insurers on a specific property address. The result is that properties that appear to be broadly similar in risk, may have one or more distinguishing features that lead to significant differences in risk profiles and associated premiums charged.
- The history and cost of non-natural disaster events occurring in an area that includes your property. As an example, a certain area might be more susceptible to theft claims and the premiums for taking on risk in that area will therefore be higher.
- Reinsurance costs. This is the cost for your insurer to obtain insurance with another insurer (known as reinsurance) to ensure that they have enough capital to cover events that result in a large number of claims (such as claims from natural disasters).
- Specific details of the property to be covered, for example, security features of the home. Other characteristics of the insured person and the insured property that make the property more or less susceptible to the risks covered under your policy. These could include the factors set out below:
- The year your home was built (for example, this relates to the introduction of building standards to minimise the damage from cyclones).
- The construction materials for the roof and walls.
- Location of your home.
- How your home is occupied.
- How you use your home. For example: residential or business use, or owned or rented.
- The age of the oldest person insured.
The Understand Insurance website also contains useful information on factors that affect premiums.
Why insurers may decide not to insure
In some cases, insurers may choose not to provide insurance if they think that the risk of a significant claim being made is too great. Factors including those discussed above not only impact on an insurer's decision about how much premium to charge, but also influence their willingness to insure.
Information on home insurance generally
For information on home insurance generally, please see ASIC's MoneySmart website. MoneySmart has information on the following topics that you might find useful:
- General information on home insurance. This provides information on protecting your home, home insurance, contents insurance, being honest with your insurer, and making a claim.
- Storms, floods & fires. This provides information on natural disaster and your home, what to do after a disaster, checking if you are covered for disasters, the risk of underinsurance, and how to get the right insurance.
- Risk of underinsurance. This provides information on not having enough cover, why you may be underinsured, checking your policy for underinsurance, and total replacement policies.
- Estimating rebuilding costs. This provides information on the pros and cons of web calculators, which online calculator to use, and shopping around for a policy that suits your needs.
- Home insurance supplementary costs. This provides information on supplementary costs and what they may or may not cover.
Unauthorised Foreign Insurers (UFIs)
In addition to establishing this website, the North Queensland home insurance initiatives announced by the Government on 23 October 2014 included measures in relation to UFIs. UFIs are foreign insurers that will normally issue insurance products to retail consumers through a broker who is an Australian Financial Services licensee.
On 30 March 2015, the Government announced the establishment of a taskforce which will explore options for reducing home, contents and strata insurance premiums in Northern Australia. The measures previously announced relating to UFIs, which would allow licensed insurance brokers to sell policies from foreign insurers, have been deferred until the taskforce process is completed in late 2015.
Please note that the insurers on which policy features and indicative premiums are provided in this website are not UFIs.
Important things to know about UFIs:
- If you are unsure whether your home insurer is a UFI, you should check your Product Disclosure Statement as all UFIs are required to disclose that they are a UFI.
- If you are considering obtaining home insurance with a UFI, you should consider asking for further information about that insurer, the country it was incorporated in, and its local laws.
- If you want to raise a dispute, having a UFI as an insurer might make resolving your dispute difficult because UFIs are not required to follow the same laws that Australian authorised insurers need to follow. However, any disputes can and should be made through the broker that signed you up to the home insurance policy with the UFI. Your broker must also be a member of an external dispute resolution (EDR) scheme. This means that any unresolved disputes with your broker, rather than the UFI, can be raised with that EDR scheme.
- If your dispute is about the conduct of the UFI (not the broker) the EDR scheme may not be able to make the UFI comply with any decision that it may make (for example, a decision that the UFI should accept a claim that it originally rejected) because the UFI may not be a member of an EDR scheme.
- Policies taken out with UFIs will not have the protection of the Financial Claims Scheme (FCS). The FCS protects among others, policyholders of general insurance companies from potential loss due to the failure of these companies. APRA is responsible for the administration of the FCS and an information booklet is available if you want to know more about how the FCS works to protect holders of general insurance policies issued by an APRA authorised insurer (as opposed to UFIs).
Wednesday, November 23, 2016