Why insurance premiums increase

Insurance premium increases look likely for both business and domestic policies over the next 12 months.

If you haven’t made a claim and nothing about your circumstances has changed, this can be extremely confusing.

We’ve put together the following information to help you understand why you might be affected by premium increases on renewal.

We’ve enjoyed a long period of low premiums

In certain sectors and markets, insurers became ultra-competitive about 10 years ago. They slashed premiums to gain business and market share.

In the past 10 years, many policy holders have had no or minimal increases in their premiums.

Unfortunately, these figures can’t be sustained forever and as a result, we’re starting to see premiums rise.

Costs have steadily increased

The cost of doing business has increased in recent years. While people enjoy wage increases and all that this brings with it, this means it’s more expensive to run insurance companies. Insurers need to pass those costs on if they are to remain in business.

Insurers can’t protect their profits by reducing costs. The number of claims they pay out is beyond their control. The only alternative for them is to raise income in the form of raising premiums.

Catastrophic conditions and reinsurance

The cost of your insurance policy depends on the relative risk involved. In general terms, low risk means lower premiums and high risk means higher premiums.

Risk is partially determined on claims history. In recent times, Australia has been seized by a range of catastrophic events. From damaging storms to floods to raging bushfires. This means one thing to insurers – lots of claims. We seem to be living in an age of increased risk. Therefore, premiums need to rise to ensure there’s a big enough pool to pay future claims from.

But it’s not even quite that simple. Most insurers have reinsurance arrangements. Put simply, reinsurance is insurance for insurers. Using reinsurance arrangements, insurers essentially transfer portions of their risk to other parties to reduce the likelihood of paying an exorbitantly large claim. Because claim levels have been so high, reinsurance costs have gone up.

Starting to see a pattern?

Increased premiums for specific types of insurance

Certain types of insurance policy premiums have been maintained by insurance companies at little financial gain to them. Industrial Special Risks (or ISR) policies are a prime example.

Insurers are now looking at the less profitable parts of their business and seeing what they can do to make them earn their keep. Insurers are increasingly raising premiums in areas that have been underperforming for them.

Litigation levels are on the rise

The number of class actions against companies and the directors and offices of companies have increased, as has the level of damages awarded.

Very often it’s a company’s insurance that covers the costs involved in defending action brought against them and it’s the insurance that covers the costs of any damages incurred.

Will insurance premiums go up forever?

It’s unlikely. The truth is insurance premiums operate in cycles. What goes up will eventually come back down.

We can’t predict exactly how long that will take, but when premiums do begin to reduce, we’ll be on the front foot to secure lower premiums for you.

We’re on your side

Whilst we may not be able to stop increases in premiums, we’ll do our very best to mitigate them for you.

Rest assured that when it comes time to renew your policies, we look at them closely. We consider alternative policies and insurers and we market your policy to secure you the best premium possible.

If we can find you a better deal, we will.