An ABC report yesterday told the story of a customer who had taken Allianz to the AFCA following a price hike. AFCA found that there were no errors in the Westpac-sold policy’s premium, but immediately the ABC found commentators who wanted to see just how insurers run their pricing models and to demand oversight. And as the US has shown us, political interference can be a poisoned chalice.
Pressure is mounting on governments to intervene in Australia’s insurance market – households reel from premium hikes that in some cases stretch into the thousands. Some advocates have called for a national price monitoring authority and stronger regulatory oversight of premiums.
Yet those proposals are being met with scepticism by insurance professionals who caution that regulation of this sort risks undermining the market’s ability to function. They argue that premiums reflect rising claims costs, the growing expense of reinsurance, government taxes and the increased severity of natural disasters – not profiteering.
"We could employ hundreds of public servants to be looking at prices every day, but I would rather see tax reform happen in this country,” ICA chief executive Andrew Hall told the broadcaster.
"I would rather see money being invested in risk reduction so that homes are built in safe locations and allow insurance to get on and do what it does best, which is be there for when the unexpected happens."
For insurers, California stands as a stark warning. Proposition 103, passed in 1988, handed regulators sweeping powers to approve or deny rate increases, effectively putting a political filter over insurers’ ability to price risk. While designed to protect households, Politicians grandstanding to sound like they are keeping greedy insurers in line have broken the insurance market. The interference has left insurers unable to adjust premiums quickly enough to reflect surging wildfire losses and reinsurance costs.
The outcome has been predictable. Carriers such as State Farm and Allstate have scaled back or stopped writing new business in the state, citing an inability to operate sustainably under suppressed pricing. The state’s FAIR Plan, a bare-bones insurer of last resort, has ballooned as homeowners are forced into high-priced and limited-coverage options that are ultimately underwritten by taxpayers who don’t live in high-risk areas.
Similar dynamics are evident in Florida (now recovering) and Louisiana, where political interference and strict rate caps have driven insurers out of the admitted market, pushing more homeowners into state-backed schemes. The reliance on surplus lines carriers in those states has surged, filling some gaps but leaving consumers with fewer protections and often higher costs.
The Australian insurance market has long prided itself on remaining competitive and relatively free of political interference. The Insurance Council of Australia has consistently argued that affordability challenges are better addressed through investment in risk mitigation and reform of state taxes, rather than artificial suppression of premiums.
Industry leaders stress that insurers need flexibility to price policies according to underlying risk – whether that risk stems from cyclone exposure in Queensland, bushfire risk in Victoria, or floodplain development in New South Wales. Restricting that flexibility, they warn, risks the same exodus of capacity now seen in parts of the United States.
With extreme weather losses mounting, the stakes are high. If governments were to impose controls on premiums, insurers may simply reduce their exposure, scale back product offerings, or exit certain markets altogether. That could leave more households uninsured or underinsured – the opposite of what reformers intend.
Rather than pursuing price caps, many in the industry advocate for policies that directly address the drivers of rising premiums. These include greater investment in resilience measures such as flood levees and stronger building codes, as well as eliminating taxes and levies that can add hundreds of dollars to annual premiums.
Consumer frustration is undeniable, and the demand for greater transparency will continue to grow. But as international experience shows, intervening directly in how insurers price risk risks destabilising the very system on which households and businesses rely. In ABC’s example, Michele Vanderlanh Smith said she did find other cheaper quotes, but said she didn’t think the burden to price shop should fall on the consumer – another great argument for clients to use the services of a competent insurance broker.
The lesson from California is clear: attempts to suppress market forces may provide short-term political cover, but the long-term cost is a weaker insurance market with fewer choices and higher systemic risk.
For Australians however, hopefully no political grandstanding, market competition and a benevolent environment will do their work.
"What we are seeing globally is the cost of reinsurance moderating and, in some areas, reduce," Hall told the ABC.
"I suspect what we will see in the coming 12 to 18 months, bar another large weather event, is insurers putting more effort into acquiring customers – and that will be a good thing in terms of pricing."
