This is why your insurance premiums keep going up

Insurance premiums have been on the rise – and for many households, they're contributing to cost-of-living stress, writes UNSW Business School's Fei Huang

If insurance seems to be getting less affordable, you’re not alone. Premiums for car, home and home contents insurance have been on the rise – and they’re contributing to rising costs of living, according to the Australian Bureau of Statistics’ latest figures.

The news follows an August report revealing 15 per cent of all households now face home insurance affordability stress, meaning their insurance premiums now cost more than four weeks of gross household income. This equates to 1.61 million households, up from 1.24 million a year ago – a 30 percent increase in just one year, the report by the Actuaries Institute found.

What impacts premiums (hint: it’s not just inflation)

To understand what’s driven premium increases, we need to understand the key factors that tend to influence home insurance premium costs. They include claims cost – the anticipated cost of claims, primarily determined by a property’s “riskiness” – as well as price inflation – because in a high-inflation environment, the costs associated with rebuilding a home (such as labour and materials) rise, which in turn increases claims costs.

Market competitiveness can also play a part. In a more competitive market, insurance prices tend to be lower.

What’s more, insurers may adjust prices based on consumers’ sensitivity to price changes, a practice known as “price optimisation”. This involves using sophisticated data mining tools to adjust premiums based on factors unrelated to risk, such as consumers’ willingness to pay.

This practice is legal in Australia, although several US states have banned price optimisation in response to concerns about fairness. Similarly, the UK in 2022 banned “price walking” – a practice where insurers charge renewing customers higher premiums than new customers with the same risk profile.

The cost of capital also plays into insurance premium costs. Insurers must hold reserves to cover future claims, and these reserves are influenced by the expected return on capital that investors expect to receive. This cost can be particularly high for catastrophe insurance.

Reinsurance costs can additionally impact insurance premiums. With the global increase in catastrophic events, reinsurance premiums have risen, leading insurers to pass these costs onto consumers. In response, the Australian government established the cyclone reinsurance pool, backed by a $10 billion guarantee, to lower insurance premiums for households and small businesses at high risk of cyclone and flood damage.

Finally, insurers also incur other costs related to managing risks, including expense loading, commission fees, taxes, and levies – and they often pass these costs on to policyholders. In New South Wales, these costs made the news when the state government abolished the Emergency Services Levy in November 2023 to reduce insurance costs for households. Before that reform, that levy added up to 18 percent to home insurance premiums.

Read more: How banning loyalty penalties can help – or hurt – consumers

Another factor is related to AI and Big Data. These mean insurers are increasingly equipped with more data and better technologies to more accurately estimate the risk of each property. This more individualised pricing approach can lead to higher insurance premiums for properties with higher risk levels.

Why have home insurance premiums increased?

In the last few months, home insurance premiums have risen due to several interrelated factors. Three are claims inflation, the current “hard market” and reinsurance costs.

Claims inflation refers to the increase in costs for repairing and rebuilding homes, driven by price inflation. It is particularly significant for those in climate-prone areas. While climate change may not be the immediate driver, the growing number of people living in high-risk areas can increase the risk exposure and exacerbate the issue.

What about costs relating to the hard market? The insurance industry operates in cycles, typically lasting 5-10 years. We are currently in a hard market, where demand for insurance exceeds supply, leading to higher premiums and reduced risk appetite among insurers.

The higher frequency and severity of climate-related claims, such as bushfires and floods, have entrenched the hard market. This is linked to higher reinsurance costs. Reinsurers have faced major global losses, which have constrained their capital and spilled over into the primary insurance market, ultimately increasing costs for policyholders.

With premiums unlikely to fall, what can consumers do?

This trend is likely to continue until inflation decreases and the market softens. As a consumer, there are three key things you can do to reduce spending on insurance premiums.

First, be risk-aware. When purchasing or renting homes, consider the insurance risks and insurance premiums. Avoid high-risk areas and opt for climate-resilient building materials and structures to mitigate risks.

Second, engage with insurers about risk and premium reduction. That is, discuss with your insurer ways to reduce risks, which can lead to lower premiums. Implementing risk mitigation strategies is one effective approach. Ideally, insurers would have more transparent and explainable channels to support customers understanding potential ways for risk and premium reduction.

Third, shop around. To avoid the “loyalty penalty” often caused by insurers’ price optimisation strategies, it’s important to compare policies and premiums from different insurers to find the best deal.

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While it’s unlikely premiums will decrease in the near future, there is hope. Researchers are beginning to look into how Australia – and the rest of the world – can transition to a climate-resilient future that does not disproportionately burden already disadvantaged communities.

To achieve this, it’s crucial to conduct evidence-based research and propose viable pathways towards socially equitable insurance solutions for climate disaster risks.

Collaborating with experts from multiple disciplines, my research agenda focuses on developing an ethical framework to assess the justice and social impact of climate disaster responses and insurance solutions, with a particular emphasis on disadvantaged communities.

Dr Fei Huang is a Senior Lecturer in the School of Risk and Actuaries Studies at UNSW Business School and Lead, Data and AI Tech at the UNSW Business AI Lab. A version of this post first appeared on 360info.