Rising Insurance Costs – it is not really surprising

A link to http://backpackertradenews.com.au/insurance-rip-off-17642 was sent to me by a frustrated insurance broker. The following is an the article which criticises the insurance industry in Queensland for the rising cost of insurance.

Insurance rip-off…

Queensland hostel operator Brent Gemmell is unimpressed with the constant rise of insurance premiums…

What is happening with our insurance? As an industry we have been stung well over the top for a long time now. But this year we have reached new heights.

We have been operating as a Backpackers/Hostel in Queensland for 15 years now, with not 1 claim! But still, due to being refused renewals for no valid reasons, we have had policies with 3 different insurance companies/underwriters in the last 5 years and with each one the premiums get higher and higher.

I heard through the grapevine we would have difficulties getting a reasonable deal this year, plus I got an email from our current broker warning of a major hike in the prices. So for the past 2 months I have had 4 brokers search the insurance world for affordable policies.

Result… The cheapest with the same cover as last year… 110% INCREASE in premiums.

Saying that, the most common response was a flat refusal. The most expensive you may be asking yourself… 230% INCREASE!!!!

I keep asking myself why?? I keep asking the brokers and insurance companies why?

Problem here is I can’t get any reasonable answers.

As a Backpackers/Hostel we are the most heavily regulated form of accommodation providers in the industry. We are scrutinised on an annual basis by the Fire Department and local council and the measures we have in place to comply with all the rules and regulations are thorough, to say the least…

I believe because we have become the lepers of the insurance world the underwriters/companies that will touch us have us over a barrel and think they can charge us what they like. And guess what… they are right. They do have us over a barrel. We can’t afford not to be insured and we can’t afford to be insured.

Please, any information on this most frustrating topic would be much appreciated.”

The earliest evidence of insurance dates back over 5,000 years where groups of people pooled the risk between themselves so that the entire community bore a small proportion of the losses, but no one who participated in the pooling was completely wiped out. While the Chinese are believed to be the first to embrace this concept of pooling the risk and paying losses out of the pool other cultures such as the Babylonians, Egyptians, Greeks and many other cultures developed or expanded on the pooling concept against risk.

Modern insurance continues this principle of pooling the risk but when catastrophes hit an area, it is possible that pool is not large enough to cover all the losses that arise. AMI Insurance in Christchurch is a recent example of this. AMI (no relation to Australia’s AAMI) was a Christchurch-based insurer that had a huge market share in that town. When the Canterbury area was devastated by a series of earthquakes, the insurer did not have enough reserves (a big enough pool) to meet all the claims and remain vialbe should another catastrophic event hit. Most insurers now spread their risk internationally to obtain as wide a pool as they can and if one area gets hit, it does not wipe out the entire pool.

Like any business is not a charity, it generates revenue and incurs costs to operate with the plan to make enough profit to attract shareholders to provide capital.

In simplest terms, the revenue streams for an insurer come from two sources; insurance premiums and investment returns.

When investment returns are high, insurers reduce their premiums in a free enterprise system and make up any underwriting losses with investment returns. The first problem for the insurance industry, and all of us that insure, is that investment returns have gone down considerably. Look at your own superannuation and you will see that the investment returns have gone down enormously.

This has put pressure on premiums. Adding to this pressure is the operating costs of insurance. The biggest single cost to general insurance industry is claims. Australia and the rest of the world has been hit by a spate of natural disasters. Let me run through just a few.

Australia:

Queensland Floods $2,400 million

Victoria Floods $122 million

Cyclone Yasi $1,330 million

Victorian Storms $412 million

Cyclone Carlos (NT) $15 million

WA Bush Fires $35 million

Margaret River Bush Fires $52 million

Christmas day storms (Melbourne) $772 million

This is over $5 billion in one year on top of the normal day to day claims of house fires, burglaries, car accidents and liability claims etc.

But it is not just Australia. I have already mentioned the New Zealand earthquakes at around $20 billion, but they also had bad snow storms and Auckland had a tornado. (Townsville got hit with one only last week). We had Hurricane Irene in the US, the Mississippi Floods, 43 major tornados and an earthquake. The losses in Japan have been horrific; both in human life and insurance payouts. The Thai floods are also estimated at over $35 billion in insured losses. Europe has had floods and storms and flooding and earthquakes in South America.

These catastrophic losses have been some of the worst in recorded history and the insurance industry has paid out billions of dollars to indemnify business and home owners in all industries including, but not limited to, backpackers.

Lloyd’s of London, one of the world’s major reinsurers, has just reported a loss of £516 million after paying out £12.9 billion in claims, £4.6 billion of which were catastrophe claims,  the largest amount in Lloyd’s 324 year history.

In some classes of insurance in Queensland, insurers were paying out more than $115 in claims for $100 in premium received. It must be remembered that insurers also have to pay rent, salaries, electricity, meet compliance costs etc. as does every business. This, of course, is not sustainable and if insurers and reinsurers did not increase premiums, then insurers would not have the funds to meet ongoing valid claims, and, in the worst cases, go into liquidation.

Every home owner and business will feel the effect of having to pay higher premiums. The backpacker industry is not being singled out.

Now to the false logic of “I have had no claims so my premium should not go up”. This means that the insurer should collect the entire cost of increased claims costs from only those that made a claim. On that logic, you make a claim of $1,000,000 and the Insurer is required to recover that loss from that Insured alone. This destroys the whole 7,000 year old concept of everyone pooling the risk.

During the 1990s and early 2000s, we all had the benefit of cheaper premiums. We quickly forget that fact. The price of insurance has become unsustainable and regretably, it has to go up by large percentages. This is all based on actuarial advice. There is still enough competition in Australia to stop price gouging.

Governments do not help the situation by the highest level of taxation on insurance premiums in the world. As premiums go up the State and Federal Governments have an immediate win fall with higher GST and Stamp Duty collections. It is worse in NSW, Victoria and Tasmania (commercial insurance only) where they still have the draconian Fire Service Levy which in rural Victoria is a staggering 85% which means with the tax on tax on tax compounding effect, insureds are paying over 120% tax on their premiums.

So what can be done? First work on reducing the risk in your business. Insurers will always reward better quality risks with lower premiums. A competent insurance broker can assist here.

Secondly, write to your state politician about the level of insurance taxes.

Last but not least, please understand that the insurance premiums are not the cost of risk. It is the cost of transferring risk from you and your family to an insurance company. The cost of risk is much more and includes policy excesses, under-insurance and self-insurance. Ask yourself, if you are not fully insured and you do have a fire, storm damage or the like, who is going to get what is left –  you and your family or the bank?

What you should not do is reduce your coverage or sum insured. Murphy’s Law is alive and well. The next home or business owner that needs to make a claim could be you and during these tough economic times you need the best possible protection available for the full value of your assests and business income. 265,997  people claimed due to the catastrophes in 2011 alone.

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