The insurance market in Northern Australia exhibits an unusual competitive dynamic: insurers are not actively trying to win market share in some high risk areas in the region, but are instead seeking to deter customers and limit their exposure by raising premiums, leading to soft competition, according to a report by the Australian Competition and Consumer Commission (ACCC). Markets at the regional level were also found to be highly concentrated.
The ACCC's analysis shows that insurance premiums are not only considerably higher in northern Australia, but they have also risen at a faster rate: shooting up 130% in real terms between 2008 and 2018, compared to an average 50% rise in the rest of the country.
Extreme weather in northern Australia, and the cost of servicing this area, are partly to blame for the high premiums that many consumers are facing. But other factors have contributed, including moves by insurers to assess risk and set premiums at an individual address level, rather than pool risks across regions, says the ACCC in its Northern Australia Insurance Inquiry first interim report, released yesterday.
Conflicts of interest in the market were common and significant, the interim report found. Most insurance brokers received payments from insurers, and commission rates of 15-20% of base premiums paid were common.
The ACCC did not find evidence that insurers were making high or excessive profits in northern Australia, or that they were using profits in northern Australia to subsidise premiums in other parts of the country. Rather, high claims and costs have resulted in the majority of insurers operating at a loss in northern Australia during the past decade, while those that were profitable had lower returns than in the rest of the country.
The report makes 15 recommendations the ACCC says should be immediately adopted to improve northern Australian insurance markets, including abolishing stamp duty on insurance products, banning commissions for insurance brokers, making products more comparable and applying unfair contract terms protections to insurance products.
The ACCC has made a further 13 draft recommendations it is seeking feedback on, including the establishment of a national insurance comparison website, restricting commission payments by insurers and intermediaries to strata managers, and the need for insurers to clearly state what discounts customers can get if they modify their home to mitigate their risks.
ACCC deputy chair Ms Delia Rickard said, “Consumers reported that products were complex and hard to compare, and that they didn’t understand how insurers were setting premiums and why they were rising.”
“Consumers also told us of long delays and unsatisfactory experiences when they made claims on their policies, experiences that clearly added to the stress of their situations.”
Ms Rickard said, “In this report, we have proposed a range of measures that could start to bring improvements to insurance markets, not only in northern regions, but also nationally if adopted more broadly.”
“However, it will still leave underlying affordability issues for some individuals that are so sharp that a stronger public policy response may be needed. Reviewing possible further policy options to improve insurance affordability will be the primary focus of the next stage of our inquiry,” Ms Rickard said.
In July 2017, the ACCC commenced its inquiry into the supply of residential (home), contents and strata insurance in northern Australia, following direction from the Australian government. A second interim report is due to the Treasurer by 30 November 2019 and a final report by 30 November 2020.
The recommendations set out in ACCC's interim report are:
1: Abolish stamp duty on home, contents and strata insurance products
2: Re-base stamp duty, use stamp duty revenue and mitigation
3: Insurers to report their brands to ASIC and where they are writing new business
4: Standardise definitions of prescribed events
5: Review and mandate standard cover
6. Unfair contract term protections should apply to insurance
7: A link to MoneySmart should be on new quotes and renewal notices
8: Better understand information that falls within ‘general financial advice’
9: Disclose costs that count towards ‘sum insured’
10: Disclose the premium, sum insured and excess on a renewal notice
11: Extend the ban on conflicted remuneration to insurance brokers
12: Better information for consumers lodging a claim
13: ASIC approval for the General Insurance Code of Practice
14: Public mitigation works and expected premium reductions
15: Building code changes to better protect interiors and contents.