Premiums Increase In The Wake of Queensland Floods

Friday, 14 January 2011  Features

Widespread flooding in Queensland may end up costing Australians more in increased insurance premiums, particularly for those who don't have insurance already. This event comes after a series of natural disasters across the Pacific have already pushed up premiums.

Michael Sherris, Professor of Actuarial Studies at the Australian School of Business, is available for comment on the risk of catastrophes, and how it impacts on premiums. He says "as supply falls and demand increases, premiums increase. In this case demand is increasing due to the catastrophic floods, and supply is falling due to capital constraints on insurers. Also, many who think they have flood insurance may find they do not because it's the wrong type of flooding for their policy. These type of river overflows are not normally covered."

The insurance industry is already reeling after 2010 was the second worst year for natural disasters since 1980. There were 950 incidents with insured losses amounting to about 37 billion dollars. Natural catastrophes in Australia and Oceania made up about 16 percent of global losses last year, the costliest being September's Christchurch earthquake.

Professor Michael Sherris says that premiums are likely to rise for all Australians, even in non-flood prone areas, because insurers pool risks by averaging losses across all policyholders. For those in areas hit by the torrential rain in Queensland and New South Wales, homeowners will certainly find their costs rise. "Premiums reflect the underlying risks so that those with houses near areas that are currently flooded, will now see they have relatively more expensive insurance."

For those purchasing insurance after a catastrophe the news is also not good, even if they are not near flood water. Michael Sherris says "Catastrophic events deplete insurer capital and prices harden, especially as homeowners realise the need for insurance, increasing demand."

He adds that the torrential rain will result in more homeowners becoming aware of their lack of insurance. "This flood is certainly a catastrophic event for those effected – and for many, it will bring home the financial costs of not having sufficient insurance. I understand why some Australians decide to risk not having sufficient insurance, but it really is time for us all to double check our policies, make sure we are covered for flooding – and if not, to decide if we are comfortable with that risk."

Professor Michael Sherris believes that there is a significant problem with under-insurance in Australia. He says that "Recent reports, such as one by ASIC that examined home insurance after the Canberra bushfires, show that Australian homeowners are under-insured. The ASIC report indicated that as many as 81 percent of consumers have insufficient insurance coverage of at least 10 percent for the costs of rebuilding their home."

There is also an issue not just with underinsurance but the definition of flood in insurance policies. "Not all policies cover flood but those that do limit flood to flash flooding from rain and run-off. Unusually in Queensland Suncorp also includes floods from rising rivers as an event. What is not covered by most insurers is riverine flood where rivers overflow and cause damage. Most of the flooding in Brisbane is riverine flood. Many insurers will not cover this because it is very predictable and systematic in its impact, however some insurers have been providing riverine flood coverage for additional premiums, and many people are likely to now look at this option, again increasing demand and pushing up premiums."

Professor Michael Sherris has also been looking at ways of managing the cost of these events and whether there should be a national disaster scheme that funds these disasters and spreads the cost more widely. "The question is how to fund this, since it would be expensive, and we may need to ensure that the costs of this are reflected in premiums if insurance companies decide that they can provide cover. Also we should look at limiting developments in flood prone areas."

The Australian Government Disaster Recovery Payment provides some minimal relief if the event is declared a disaster but not enough to cover losses that would normally be insured. He adds "Australia is a lucky country, in that it is not as exposed to major catastrophes such as earthquakes and hurricanes to the extent of some other areas. However it is very much a land of 'drought and flooding rain' - and that results in major losses impacting many Australians."