Insurance is great protection for all sorts of life’s curve balls, but one thing it can’t protect us – or the industry itself from – is rising costs.
No one likes the idea of having to pay more for anything. And these days it feels like we are all paying more for everything – from petrol to mortgages and rent, food to utilities, entertainment to homewares.
The cost of living – and of doing business – is rising.
It’s all about supply and demand of course, and the heavy impacts on supply chains as a result of COVID-19, the war in Ukraine and natural disasters at home over the past few years.
The insurance industry isn’t immune from those impacts.
This is not often welcomed news for landlords… and property managers who must explain to their clients that the cost of their insurance policy is rising.
However, there are often factors outside of an insurer’s control that mean they need to increase prices.
A change to landlord insurance premiums respond to a range of different factors specific to the property, such as the type of policy, the age and condition of the building, sums insured, the risks at the property such as natural disaster or crime rate, and other matters like the rent.
In some circumstances, the policyholder’s claims history may also influence the premium.
There are also government charges and taxes like GST, stamp duty and levies that are factored in.
But there are factors outside of the individual property that get considered too. And these can have a knock-on impact for premiums.
The cost of replacement is one factor that demonstrates the domino effect perfectly.
Replacing and repairing homes is more expensive than ever.
Tradies are in high demand (isn’t everyone?). Australia’s unemployment rate is at record lows.
That is underlined in the construction industry and the irony is that government ‘Covid recovery’ incentives have helped boost demand at a time when people and materials are hard to get.
So construction costs have been steadily rising (some would say it feels a bit faster than steady!).
According to CoreLogic’s Cordell Construction Cost Index, national construction costs increased nine per cent over the 12 months to March 2022 – the highest annual growth rate on record outside of the introduction of the GST.
These costs are being driven by the rising prices of both raw and finished construction materials.
For example, in 2021, the cost of timber rose 50-100 per cent, steel 30-60 per cent and concrete 20-40 per cent.
The supply chain disruptions (from production to delivery) caused by COVID-19, recent natural disasters and now the war in the Ukraine has been a major contributing factor for the scarcity of the products – increasing costs and causing delivery delays.
Then there’s inflation – which is having a flow-on effect by increasing the cost of doing business.
Add in the worst skilled and unskilled labour shortages the industry has experienced in over two decades (according to the HIA Trades Availability Index), and it’s no wonder construction costs are growing.
But what this means is that it’s costing so much more to rebuild and replace damaged property.
As it costs insurers more to reimburse losses, it follows that insurance premiums must rise to reflect the increased costs.
This is the case for all property insurance, not just landlord policies, and applies to home and contents for our own homes, business premises policies, strata insurance and so on.
The spate of natural disasters experienced over the last few years is also having a big impact on insurers.
The demand for building services following each catastrophe event is adding more pressure to the burgeoning construction costs and the sheer number of claims is also contributing to another domino effect impacting everyone’s premiums.
Ratings agency AM Best estimates the total insured cost of declared catastrophic events between fiscal years 2019 and 2021 is approximately $11 billion – compared with $4.6 billion for the three previous years.
And the February/March floods have been declared Australia’s costliest flood to date, with insured losses from just this one event expected to top $4.8 billion.
With the frequency and severity of extreme weather events forecast to increase in the years ahead, the costs for insurers will continue to grow.
It’s simply not sustainable for insurers to absorb cost increases, they need to be passed on.
Explaining premium increases to landlords
While it’s true to say that none of us like the idea of paying more, the reality is that sometimes there is no other option.
Insurers are not immune from rising costs and it’s inevitable that at some time those rising costs will need to be passed on to policyholders.
Insurers must have enough money available to pay out future claims, so they need to work out how much they need to charge for premiums in order to protect policyholders and maintain the business’ sustainability.
To work out the right premium to charge each policyholder, the insurer needs to calculate the risk that the property and owner pose.
They’ll look at factors specific to the property like its age and condition, the sums insured and (sometimes) the owner’s claims history.
But insurers also need to factor in other costs outside of the individual property.
Insurance isn’t immune from the impacts of global and local events, economic conditions or cost increases.
So when things happen or situations evolve, there can be a flow-on effect which impacts premiums.
These include things like:
- increasing repair and replacement costs
- large-scale claims due to natural disasters
- inflation and changes to government charges
- the cost of doing business and other commercial considerations.
This is why insurance premiums need to be adjusted to reflect the increased costs.
