A new report into the causes of rising insurance premiums highlights the importance of working collaboratively to manage climate risks to drive down premiums, while also suggesting changes to the way insurance policies are taxed to improve fairness and affordability for consumers.
The report by the Tasmanian Policy Exchange at the University of Tasmania outlines how rising risks from climate change, combined with higher building costs and taxes, have pushed up insurance premiums across Australia.
Over the past 10 years, the cost of most general insurance products in Australia has increased by 76 per cent on average – more than twice the rate of inflation. While price rises in Tasmania have been slightly lower, they are still putting significant pressure on families and businesses.
The increases are driven by several factors. Building costs have risen by 57 per cent, natural disasters such as bushfires are becoming more frequent and severe, and global interest rates remain high. Taxes also make up a large portion of insurance premiums. Despite premium increases over the past decade, insurers have actually made a net loss on home insurance products in four of the past five years.
The Director of the TPE, Professor Richard Eccleston, said people living in high-risk areas, especially those exposed to bushfires and floods, are paying much higher premiums. “Some of these communities are also among the State’s poorest, meaning those who most need insurance are often increasingly unable to afford it.”
While the cost of natural-disaster protection in an average Tasmanian home insurance policy is relatively modest, the report’s detailed analysis of industry data suggests there are approximately 19,700 residential properties in Tasmania where fire and flood cover alone exceeds $1,000 a year. By 2040, this number is expected to more than double to just under 41,000 properties.
The report stresses that reducing disaster risk – at the community and household level – is the best long-term way to bring down insurance costs. Research from the Tasmanian Fire Centre at the University of Tasmania shows that better management of bushland near homes could dramatically cut fire risk. For example, active vegetation management within 50 metres of homes could reduce dangerous bushfire exposure in Hobart and Glenorchy by 68 per cent.
Another option identified in the report is a change to how insurance taxes are calculated. Taxes are currently based on the price of the insurance premium, meaning that people in higher-risk areas pay more tax because their premiums are higher. The report suggests basing the tax on the value of the property being insured.
Professor Eccleston said this would not increase overall tax revenue but would make the system fairer by reducing costs for lower-value homes in high-risk areas, while slightly increasing costs for higher-value properties.
The report concludes that there is no quick and simple fix to improve insurance affordability: "Once established, TasInsure should focus on developing and delivering collaborative, long-term strategies to address the underlying causes of insurance risk."
The report, titled Addressing climate risk and insurance affordability in Tasmania, has been published by the TPE with support from Royal Automobile Club of Tasmania (RACT).
Read the report at www.utas.edu.au/tpe