Bushfires mean Insurance premiums likely to increase

Wednesday, 23 October 2013  Media Alerts

Widespread bushfires in New South Wales may end up costing all Australians more in increased insurance premiums, particularly for those who don't have insurance already.

Michael S​herris, Professor of Actuarial Studies at UNSW's Australian School of Business, is available for comment on the risk of catastrophes, and how it impacts on premiums. He said "the current estimated $100m in losses from the NSW bushfires is significant enough. Homeowners face the difficulty of also increasing premiums, particularly in more risky areas. The issue is, as supply falls and demand increases, premiums increase. In this case demand is increasing due to the catastrophic fires, and supply is limited due to capital constraints and higher reinsurance costs for insurers."

Insurers have received around 900 claims to a value of more than $100m in losses due to the bushfires sweeping across NSW, according to the Insurance Council of Australia, and many more are to be lodged.
Professor Michael Sherris said that premiums are likely to rise for all Australians, even in non-bushfire prone areas, because insurers pool risks by averaging losses across all policyholders. For those in areas of New South Wales hit, homeowners will certainly find their costs rise. "Premiums reflect the underlying risks so that those with houses near areas that are currently on fire will in future have relatively more expensive insurance, as insurers are assessing and charging for risks more carefully."

He said "bushfires are a regular event in Australia major fires in the past producing significant losses of property. Although floods in recent years and other natural disasters, such as the Newcastle earthquake in 1989 and the Sydney Hailstorms in 1999 have been more substantial in terms of losses, bushfires are regular natural disaster events in Australia."
The Insurance Council of Australia reports one in 20 homes does not have any building insurance, and one in three homes will not have contents insurance. Other homeowners dramatically underestimate the amount of insurance they need. "Underinsurance is a major issue, because people under-estimate how much it would cost to replace the content of their homes." he said.

Professor Michael Sherris believes that there is a significant problem with under-insurance in Australia, partly because of problems in estimating the sum insured. He said "recent reports, such as one by ASIC after the Canberra bushfires, show that Australian homeowners are under-insured, with as many as 81 percent having insufficient insurance coverage for the costs of rebuilding their home."

"Many methods used to estimate the level of cover can result in an underestimate," he said. "Even on-line calculators available on insurers web sites can vary in the suggested level of cover required, and building costs do not always move in line with inflation. Homeowners should therefore shop around and consider changing the excess to make the insurance more affordable."
Professor Michael Sherris has also been looking at ways of managing the cost of these events how national disaster scheme which spreads the cost more widely. "Although premiums can appear to be expensive for more regularly occurring risks, the benefits of a broader community approach could be beneficial. Mitigation is also important. We have the same issues as we have for flood prone areas. We should look at more effective controls and limits on developments in the bush."

For further comment call Michael Sherris on 02 9385 2333, or Email m.sherris@unsw.edu.au
Media contact: Julian Lorkin: 02 9385 9887