The Minister for Financial Services and Superannuation today released the Australian Government Actuary's (AGA) report into strata title insurance price rises in North Queensland.
The report found that strata title insurance was significantly under-priced for a number of years from 2006-07 onwards, and that one of the likely factors contributing to the incorrect pricing of North Queensland strata title insurance was a lack of sophistication and rigour in the pricing methodologies that were being applied to that business segment by insurers.
The report found this lack of sophistication and rigour was because this business segment represented, and continues to represent, a very small share of total property being insured, and hence did not warrant much attention from insurers. Subsequent and significant insurance losses for unit complexes, apartment blocks and other buildings of this type have focused the attention of insurers who are now bringing more rigour to their pricing policies in North Queensland.
"My intention in releasing this report promptly is to inform the community of the findings," Mr Shorten said.
"The Government understands that the steep increases in the price of strata insurance in North Queensland is causing concern for residents," Minister Shorten said. "It is clearly the case that pricing errors observed in this report are unlikely to engender confidence in the insurance industry, and this is clearly one of the lessons for the industry to learn."
The findings of the Australian Government Actuary do suggest that current market conditions are more likely to attract more insurers into the market.
The House of Representatives Standing Committee reported in March this year that concerns about the affordability of strata title insurance was confined to the North Queensland. This Committee also found there was no merit in the Federal Government or Queensland Government entering the market for strata insurance. A similar finding was made by the Productivity Commission's Draft Report on Barriers to Climate Change Adaptation.
The Minister will put this issue on the agenda at the next meeting of the Insurance Reform Advisory Group and will invite representatives from Queensland to attend. The Minister will also be seeking an update from various stakeholders on how the House of Representative recommendations are progressing.
"The Insurance Council of Australia has raised the option of whether strata complexes could potentially reduce their insurance premiums via discussing a higher excess with their insurer, and options like this are worth examining in more detail," Minister Shorten said.
The Minister thanked the Australian Government Actuary and also the participating insurers for their cooperation, time and effort in the preparation of the report.
The report is available on the Australian Government Actuary's website.
19 October 2012
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Background
In late 2011, the Government became aware of significant increases in residential strata title insurance in far north Queensland, particularly following Cyclone Yasi in February 2011. Large premium increases were also leading to community concerns about the affordability of strata title insurance and the degree of competition in this segment of the insurance market.
In response, on 23 November 2011, the Government requested that the House of Representatives Standing Committee on Social Policy and Legal Affairs inquiry into claims processing by the insurance industry be broadened to also consider issues around residential strata title insurance, particularly in northern Australia. The terms of reference for the inquiry provided to the Committee by the Government focussed on identifying: the magnitude and underlying causes of insurance premium increases; the ability of insurers to price risk; the degree of consumer awareness of different insurance options and the extent of any market failure.
The Inquiry had regard to two key principles:
- that individuals and businesses should be encouraged to insure themselves where practicable; and
- that Government intervention in private insurance markets is justifiable only where, and to the extent that, there is clear failure by the private market to offer appropriate cover.
The House of Representatives Standing Committee on Social Policy and Legal Affairs released its report titled ‘In the wake of disasters Volume 2: The affordability of residential strata title insurance' (the Report) on 21 March 2012. The Report made nine recommendations a majority of which called for further investigation into various matters identified by the Inquiry.
The Government noted that the Committee found that concerns about the affordability of strata title insurance were confined to the north Queensland area. The Government also noted that the Committee saw ‘no merit in the Australian Government entering the market for strata insurance, nor can it recommend that the Queensland Government do the same'.
The Government's response to each of the recommendations can be found at the Parliament of Australia Website.