Don’t blame insurers - blame the system
The bills are rolling in and then you notice the insurance policy for the house and contents is due. The cost seems astronomical and you are left thinking how insuring your property can be so expensive.
How will you afford to pay the insurance bill? The question really should be how you can neglect to pay for insurance, instead putting your economic livelihood at stake. You study your policy to look for clues to justify the cost.
Why is the policy so expensive? Are there any ways of making the premium any cheaper? Although you are analysing the cost, there is little understanding of how the premium is actually calculated.
The decision to obtain adequate levels of insurance, and comparing the insurance companies, is a crucial one, but it is often given insufficient attention.
Many people are simply overwhelmed by the options and some do not properly understand the terminology. For others, the main point of comparison is simply pricing without really knowing what is covered. Some people feel that the cost of insurance is too high as a result of commercial insurance entities trying to maximise profits.
Many people fail to understand the process involved in pricing insurance, ao there is a degree of scepticism and a lack of trust in some insurers when in fact this is simply the result of an inadequate understanding of the situation.
One of the most misunderstood aspects of insurance pricing is the cost of taxes which are added to a base policy and which substantially increase the cost of insurance.
The reality for insurance policies is that at any time they may be subjected to three different levels of taxation (potentially two state taxes and the federal GST). To complicate the problem these taxes are often calculated in a cascading manner whereby a proportion of tax revenue is included in the calculation of the next level of taxation ultimately resulting in double or even triple taxation burden.
In Victoria and New South Wales the first level of taxation is the fire services levy which is imposed upon an insurance policy. In Queensland, Western Australia, South Australia, Tasmania and the Northern Territory there is no fire services levy - however, these states are still subjected to the remaining two taxes. Subsequently the GST is applied universally to insurance policies in all states which adds an additional 10% to the cost of insurance.
Finally, the increased policy amount is then subjected to a stamp duty tax which can further increase the total cost by another 8 – 10 per cent depending upon the tax rate in the particular state where the insurance policy is issued. The bottom line is that this is creating an unduly inflated insurance cost.
Insurance companies are often blamed for the cost of insurance because many of the taxes are very well hidden and often poorly understood amongst the community. People often overlook the fact that it is not in the insurer’s interest offer unaffordable policies.
Insurance works on the basis of pooling risk, something which requires a careful look at the economic implications of accepting or declining certain potential risks.
Insurers have obligations primarily to manage and share risk and ensure solvency so that the insured can receive the full amount of any losses to which they may be subjected, provided their insurance policy allows for this.
The collapse of HIH insurance in 2003 is a reminder of the devastating effects of an insurer becoming insolvent. In line with the obligation to manage risk, insurers are able to be selective about the risk which they adopt and those which they decide to decline.
They are not obliged to undertake risks which may financially ruin them. The only problem with this has been that in some areas, some insurers who feel that the risk is simply too high are declining to offer certain types of insurance - such as flood-based insurance.
While in principle this may reflect a high risk, the failure of the insurance industry to accept certain risk has the potential for entire communities to suffer financial ruin if there is a large scale loss bearing event such as a flood. This can lead to sociological implications and perpetrate a cycle of dependency whereby many are forced to rely on government handouts or public benevolence.
So where there are no legal obligations for insurers to accept high risks and to offer individuals insurance products for all types of risks, the situation is grim
Although it would be entirely inappropriate to force insurers to accept high risks, there should be greater co-operation between the insurance industry and the government to promote resilience.
In particular, if certain planning procedures were introduced to ensure that structures were more resilient in the case of adverse weather related events, this would lessen the risk. Insurers should therefore be obliged to offer insurance products where the risk of loss is lessened.
Currently, insurers theoretically satisfy their obligations without considering the moral implications of refusing insurance products for certain risks.
Ultimately however, the blame cannot be cast against insurers themselves but rather it is the system which enables them to prioritise profits and financial stability rather than considering the economic implication for society as a whole in refusing certain insurance products.
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