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Don’t blame insurers - blame the system

Rachel Carter

by Rachel Carter

20 Jan 05:40am

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Filed under: Brisbane Floods, Insurance, Insurance Companies, Natural Disaster, Queensland Floods

25 comments

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.

Waiting a while for the bus, and the insurance company. Picture: Getty

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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25 comments

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    • Jay says:

      06:03am | 20/01/11

      Rachel, having worked in the Industry for many years, rest assured it is not the system that is the problem; the Insurers are the system.The Insurance Council of Australia has been negotiating for 8 years with the Govt about using a generic term to cover flood. 8 years. The ICA continues to stonewall any discussion as usal. The Insurance industry is a powerful lobby and they have always been concerned that the Govt would force something upon them, like compulsory third party insurance, which they nearly did until the Industry agreed to modify a number of their Third party policies.The Govt backed down..again, Do you see Insurers advertise that people can claim from their Third Party policies if they struck by an uninsured driver? Conveniently overlooked. You see my naive Rachel, the Insurance industry has only one interest.$$$$$$$$$.They like to pretend they have a moral compass, but the reality is that they could not give a stuff.When most State Govts decided to sell off their respective Insurance offices, the Industry did hand stands.Finally they could control the industry lock stock and barell. They spend millions and millions of dollars annually to purchase naming rights on Stadiums, and on umpire shirts, and bankroll horse racing.How does this benefit the customers whose premiums continue to climb and climb each year with lame excuses from the Insurers to justify their bonuses?. Home & Contents insurance is the cash cow that Company’s rely upon, and yet each year they look for further ways to reduce and yet they still have the hide to increase their premiums. Please do not continue to justify these snake oil salesmen.

      Reply

    • Mel says:

      08:28am | 20/01/11

      Couldn’t have said it better myself.

      I also don’t condone ignorance as a defence - if you don’t know whats in your policy - don’t pay for it, simple really.

      And if you don’t understand, find a way to.
      We also need to stop letting them get away with over charging us

      (my isurance company wanted to charge me an extra $500 for car insurance because i was under 25 - found the same cover through the same insurances internet quoting system to be $500 less) - I told them that was the last time i’d renew my policy (i was running out of time) - they also tried to force me to remove my fathers name from my insurance policy, who is a driver of the car - so they could charge me more again, just for being under 25.

    • jf says:

      08:44am | 20/01/11

      I think Rachel hit it o the head when she said that “People often overlook the fact that it is not in the insurer’s interest offer unaffordable policies”. Of course they are in the business of making profit, just like any business. In fact Jay, you said it yourself when you said “each year they look for further ways to reduce”. It is a competitive industry and if insurance is mis-priced, a competitor will price it accordingly.

      The real snake-oil salesmen are the ‘financial journalists’. For years a number of individuals have been enhancing their popular perception by disseminating banal, homey financial advice. They are telling people that they don’t need advice, that the can get cheaper elsewhere and that the financial services industry participants should be shopped until they are humbled. Now the consequences of not getting advice and/or seeking the cheapest product are being bourne by consumers.

      These miserable opportunists build their repuations and their bank balances off the back of consumer’s financial naivety and vulnerability. Now, having told them that they didn’t need advice and that the cheapest product was the best, they are dodging accountability by blaming the insurance companies for not meeting obligations that they never took on.

      Just as a go to a dentist twice a year and get a medical check once a year, I use an insurance broker and so am confident that my policies are appropriate and what I need, I use an investment adviser and am confident that my humble savings are well managed and appropriate to my needs (not to much risk not to little) - thanks to him I survived the GFS. I stick to what I do and let the experts manage my affairs and my health. Just as someone who doesn’t go to a dentist can’t blame the dental industry if their teeth rot it is tempting to say that those that don’t have inadequate insurance have no-one to blame but themselves. Sadly, many people that may have gone to an insurance expert for advice didn’t because their trusted source on the tv told them not to.

      As to a standardised definition of ‘flood’, it is hard to believe that anyone taht worked in insurance would endorse this. Most people that I know understand that flood has different meanings. Personally, I am want cover for floods from many things. However, I don’t need cover for riverine floods and would prefer to have the choice to not select it.

      The very same people that are calling for cheaper products and greater product choice and flexibilty are the same people calling for greater product consistency and regulation. You can’t have it both ways.

      As to the “moral implications of refusing insurance products for certain risks” what moral implications. Why do insurance companies have any greater moral implication to cover unacceptable risks than any other business, entity or individual?

      Why must insurers consider the “economic implication for society as a whole in refusing certain insurance products”. They have no more obligation to provide these than does a builder have to build infrastructure for no charge or than a journalist to work for a national broadcaster for no pay.

    • David says:

      09:48am | 20/01/11

      1. Home and contents insurance is not a cash cow, a lot of insurance companys have been lucky to break even in the last couple of years. A $1000 a year premium is pretty cheap when you consider that some is taxes , the wages of all the insurance staff have to be paid ( would you work for free ?) and in the event of the house and contents being destroyed payouts are in the hundreds of thousands of dollars.
      2. It is standard business policy to advertise and sponsor. Look at retail stores, banks, etc etc. Why have a cheap shot at the insurance companys ?
      3. Insurance is highly regulated by the INSURANCE CONTRACTS ACT 1984 and . ), FINANCIAL SERVICES REFORM ACT 2001. Although you would know this having worked in the industry.
      4. Any business can only be expected to fulfill their contractual obligations. Especially if paying more will lead to financial ruin.
      5. I assume you don’t have insurance as the companys are snaik oil salesmen. Good luck if your car is stolen or the roof of your house is ripped of in a storm.
      6. No company should be forced to provide a service or product that is financially unviable.
      7. It is the ACCC and consumer groups that have squashed the idea of a standard flood definition.
      8. The insurance industry has to make a profit like all business. They have to plan for the future and make sure they keep on employing the 1000’s of people already dependant on their existance.
      9. Insurance is a necessary part of our economy. Thousands of claims are paid per week for homes, cars, businesses etc. Without insurance companys we would not have an economy.

    • Jay says:

      10:05am | 20/01/11

      JF & others,
      The hardest work for an Insurance Company is to write the business. Once they have it they know that 9/10 times the person will renew.
      Renewal rates tend to stay fairly constant even with premium increases.The trick is to spend a couple of hours one day of the year and shop around. I was insured for 18 years with GIO never made a claim and my premium increased 16%. When I told them I was cancelling surprise surprise they matched the new rate i had found.I enjoyed telling them to f*** off (politely ofcourse)
      Each year I make the calls and for the past three years, my premium has not increased. ALSO before signing up for motor vehicle insurance ALWAYS ask them if you have a choice of repairer.If you don’t care fine; but you will be stunned at where they send some cars to be repaired. If you own a prestige vehicle make sure the repairer is acredited with the manufacturer…no if’s or buts or it could end up costing you a fortune.The reason why some insurance Companys offer a lifetime guarantee is because half of their acredited repairers cannot get the job done right the first 5 times. If you have been in a major collission and had a car repaired get it checked independently via the manufacturer.Insurance Coys prey on lazy people who cannot be bothered.

    • pokkeme says:

      06:45am | 20/01/11

      My policy was due in December. I was unhappy with the terms and conditions of my current provider, so searched for another insurer that would cover for cyclones, as most do not. I couldn’t find one, so had to stick with my current policy, which does not cover for rising water, only falling water. That falling water ultimately becomes rising water is not a debatable argument,  so as I perceived cyclones to be a more damaging threat in my neck of the woods, I reluctantly renewed my existing policy, and can only assume that many other Queenslanders are insured with this company that chooses not to cover for floodwaters.

      Reply

    • Sarah says:

      04:41pm | 20/01/11

      Pokkeme, which company is that? I know Suncorp covers for Storm & Flood - they would not decline a cyclone claim as a cyclone is still a storm system… I did not realise cyclone had to be listed as a separate event?

    • pokkeme says:

      10:12am | 21/01/11

      Hey Sarah, Suncorp are the only insurers I could find Australia-wide that would cover cyclone. Flood-wise, Suncorp made it crystal clear that they wouldn’t cover rising water, only falling water damage. Living in north QLD, I had to go with the more likely option of cyclone. Not happy, Jan…

    • Tim says:

      08:15am | 20/01/11

      A house is usually your biggest investment.
      How can you afford not to have it insured for appropriate risk?
      Far too many people take the “she’ll be right” approach, and then when something goes wrong act like they should be covered anyway.

      Reply

    • Which Insurance COmpany says:

      09:28am | 20/01/11

      I had full flood insurance but the insurance company sent a clause update, disguised as their usual junk mail, half way through the policy redefining flood and removing half the flood cover.  There was no reduction in the premium and no explanation other than it would make things simpler.  It sure does.

      Reply

    • jf says:

      09:47am | 20/01/11

      As much as I believe that the in the majority of cases, those that aren’t adequately and appropriately insured only have themselves to blame this sort of behaviour is unconscionable.

      If insurance companies do vary the terms of the contract it should be transparent and obvious. If it isn’t they should be dealth with harshly and fearlessly.

    • David says:

      10:14am | 20/01/11

      Insurance contracts generally last 12 months. The initial terms of the contrace cannot be changed during those twelve months without the consent of both parties. Insurance companys can however alter the terms of the contract at renewal ( another 12 month contract). The insurer will include another letter explaining the changes. It is up to the insured to READ this and if they don’t like it insure elseware, there is plenty of competition out there. Pretty simple stuff really.

    • Tim says:

      10:21am | 20/01/11

      They can’t change the policy half way through the contract period. It would have only applied from the next renewal date.
      Maybe you should read all correspondence from your insurance company instead of treating it like “usual junk mail”?

    • Kika says:

      10:36am | 20/01/11

      Look elsewhere then! Nobody is forcing you to insure with any particular company. Don’t even believe their rubbish ‘bundling’ or no claim bonuses. They are only tricks to keep you insured with them. If you can find a better policy and premium, go with it. I recently changed my health insurers based on bad service and being treated like I ripped them off (even though they declined my claim, but paid me anyway?? My fault? I gave them the receipts to prove my claim and they chose to pay me). So I changed insurers and saved heaps. Yes, the premium was less and I understand that my coverage may not be to the scope of my previous insurer.

    • David says:

      11:07am | 20/01/11

      Tim, both parties regularly alter contracts mid term. Changes to addresses, changes to sum insureds,adding and removing items, cancelling the insurance. The great majority do come at the request of the insured and all represent a change to the initial contracy. My insurance company added extra benefits mid term.

    • Tim says:

      12:19pm | 20/01/11

      Yes David,
      but the insurance company can’t unilaterally change your policy without your consent during the contract period. The situation described above would be a change in policy from the renewal date.

    • Kika says:

      10:44am | 20/01/11

      I really don’t think insurers are out there to rip people off. They are a business, not a charity, but they are bound by law not to mislead their customers.

      It’s fact that certain insurers are easier to deal with in general let alone claiming through them. I can rattle off a list of those I would avoid with a ten foot pole.

      If you don’t understand your policy, call them. If the call centre people don’t understand or don’t explain it properly, ask to speak to Underwriting. They write the policies and are the ones in charged of it’s interpretation so speak to them. If you aren’t happy with the level of cover you have, compared with your premium, look elsewhere. Nothing binds you to an insurer. Don’t fall for the sales gimmicks like no claim bonus gurantees and bundling. If you can get a better policy at a better price, do it! And here’s a tip - if you find them hard to deal with and you get poor customer service, can you imagine what it’s like trying to claim from them??

      Reply

    • Miles Heffernan says:

      02:44pm | 20/01/11

      Some of these comments seem like simple solutions to a complex problem.  Jay, perhaps the naivity is closer to your keyboard than Rachel’s?

      Corporatations should be able to underwrite their own risk, but this leaves significant blocs of people who cannot be insured or have huge premiums.

      Governments have to balance being to interventionist while protecting their citizens. It would seem 8 years of stalling and corporate strategy may be washed away with the floods.

      I hope the author’s PhD brings us closer to the solution, whether fire or flood.

      Reply

    • John A Neve says:

      04:50pm | 20/01/11

      Miles,
      Governments are the people, or at least that is what we are lead to believe?
      We live it is claimed, in a Free Enterprize society, we are also a (so it is claimed), first world country?
      If people cannot or will not take the time and effort to insure their property, why should the state help them?

    • Static says:

      03:05pm | 20/01/11

      Loved Tom baker,but for me it was Will hartnell who is THE doctor

      Reply

    • 4lead says:

      05:30pm | 20/01/11

      Oh good Lord, some of the comments about insurance companies following the floods are as daft as the complaints about banks trying to make profits from mortgage customers.  We did not cease to live in a free, capitalist country because of an undoubtedly tragic flood.  Insurance companies are private companies that do not exist for some moral reason - they exist to make money.  If we must find someone or something to blame for a natural disaster, we should start by asking the tough question of why so many Australians have been allowed to build homes in areas prone to disaster, whether by flood or fire.  Then we could wonder why it is that it is the insurance companies’ fault that customers don’t read their policies.  Discovering whether you’re covered for flood is not that difficult, especially when only one company in Queensland covers flood.  This isn’t a case of the answer being hidden in the fine print - if you live next to a river that massively floods every few decades, surely you would ask your insurance company if they cover flood.  I have great sympathy for the suffering Queenslanders have endured this past fortnight, but making absurd excuses and seeking to blame the evil insurance companies is not part of that sympathy.

      Reply

    • Joseph says:

      05:40pm | 20/01/11

      I work in the industry and can understand both sides. Obviously they are there to make a profit. They all do their best to make a profit, but we are bound by strict laws. We can’t lie to customers, but admittedly some people make light of things like flood coverage etc

      The one I work for tries to ensure that only lower risk customers have policies for them. This is good other policy holders because the less they have to pay in claims, the less the premiums go up by. Conversely, if an insurer has many, many customers and they are paying many claims, the money paid out has to come from somewhere.

      Also, if you have never heard of a company and they have cheap prices, how is this possibly a good thing? You are ultimately paying for the claims experience you hope you never have. Cheap policies often mean stuff is missing or that they will cut corners at claim time.

      Don’t blame insurance companies if they don’t have flood coverage. It sucks if you don’t have it, but for them to pay out potentially hundreds of millions of dollars for something they aren’t obligated to could send them bankrupt and then all their other customer suffer.

      Reply

    • Bananabender says:

      06:53pm | 20/01/11

      I live on a hill 50 metres above the Brisbane River. Why the hell should I be forced to subsidise people who are stupid enough to live in low-lying areas? Brisbane has had four massive floods since 1840. There is no excuse for not being aware of the risk.

      Don’t give me claptrap about people being too poor to move to higher ground. The BCC offered to buy out flood prone areas such as Rocklea. The council got a handful of acceptances. All those who refused the buyout have now lost their houses.

      Most of the people who got flooded in Brisbane were affluent. Chelmer, Hamilton, St Lucia and Tennyson are the most expensive suburbs in Brisbane. Some of the houses that were flooded were worth $10-20 million.

      Reply

    • Mark says:

      01:05am | 21/01/11

      There is an interesting point that hasn’t been discussed yet. The landlord tenant relationship. A landlord is responsible for the building and a tenant for fixtures and fittings. What happens in say a shop if the landlord isn’t covered for flood insurance but the tenant is. The tenant recovers his damaged stock but the building is damaged/destroyed. It could be messier if the tenant reimburses the owner for the building insurance as often occurs in commercial leases.

    • Daylight robbery says:

      09:01am | 21/01/11

      Councils should provide online mapping of designated spatial flood areas.  Insurance companies aren’t going to insure in these areas for nothing.  People never used to have much in the flood areas and were prepared to lose it.  Now property is worth more, or less maybe at present.

      At the end of the day the public are not made aware of their definitive location to risk.  This should be well itemised in their insurance policy in big letters in an industry standard measure.

      Many councils ensure new buildings are built above 1 in 100 year flood events.

      People should check their contract of sale when purchasing a house.  If they have not been informed then go back to the seller.

      Reply
 
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