Soaring home repair costs threaten insurance industry

Soaring home repair costs threaten insurance industry | Insurance Business Australia

Soaring home repair costs threaten insurance industry

Home repair costs are on the rise as naturals disasters increase in frequency and severity across Australia, aggravating inflationary threats for the insurance industry.

According to an Australian Financial Review (AFR) report, the recent catastrophic flooding in Queensland and New South Wales (NSW) exacerbated the home repair costs issue, with analysts predicting the insurance bill to hit $3 billion.

As a result, analysts expect reinsurers to tighten some specific coverage while remaining in the market and insurers to reduce their levels of reinsurance cover as they face higher costs, with Insurance Australia Group (IAG) and Suncorp Group (Suncorp) already in talks with their reinsurers in certain levels of cover.

UBS analyst Scott Russell recently said the insurance industry is having difficulty facing the recent flooding's secondary implications, including additional inflationary squeezes on prices and availability of material and labour.

“The cost of repairing a home insurance claim has been inflating far greater than [official inflation] into the end of last year,” said Russell, as reported by AFR. “You're doing well to find a tradie. If you were to put in a home insurance claim today, the cost of repairing that is going to be a lot greater than what it was this time last year, even if it's unrelated to the floods.”

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Reinsurers also offer the Australian insurance industry “aggregate” cover following a myriad of smaller weather events. However, Russell said this cover had “become uneconomic for most reinsurers, certainly in the past six to nine months if we consider some major weather events around the world.”

Meanwhile, Hunter Green analyst Mark Tomlins expects the higher cost of capital and the recent losses to see premium increases pass on to insurers, as well as “reduced capacity being available for volatility management products, such as dropdowns and aggregate covers.”

In addition, amid concerns about underinsurance, Tomlins said the rising inflation might make customers more sensitive to premium rises and trigger some client losses.

“It's unlikely that insurers will be able to sustain the eye-watering top-line growth required to compensate for all the margin impact of the recent events, and inflation,” he said, as reported by AFR.

However, the Australian insurance industry's future is not that bleak, with the federal government recently passing the Treasury Laws Amendment (Cyclone and Flood Damage Reinsurance Pool) Bill 2022 through Parliament to improve insurance affordability in cyclone-prone areas. It also announced that it will split the cost of Queensland's multi-million-dollar extreme weather resilience funding.