Opinion
Looming insurance crisis could make the GFC ‘look like a picnic’
Shane Wright
Senior economics correspondentLast week, an envelope with a window on the front arrived to tell me my insurer was lifting the cost of protecting the family’s 10-year-old vehicle by 21 per cent.
After the previous year’s premium increase, the total bill has climbed a third in two years. To make matters worse, the value of the coverage has actually diminished (by about $1200).
The 2022 floods that devastated areas such as Lismore were the single largest loss ever experienced by Australian insurers.Credit: Getty
My colleague Rachel Clun last week revealed that Assistant Treasurer Stephen Jones is broadening a planned inquiry into insurance over fears that, very soon, insurance will become too expensive for ordinary Australians.
If the blowout in insurance premiums – both here and overseas – is not dealt with soon, the global economy will go through roiling turmoil that will make the global financial crisis look like an afternoon picnic.
And while inflation is causing some of the trouble right now, the long-term issue confronting people, business and governments is the spiralling cost of climate change-related natural disasters around the world.
For all those who deny climate change is real, who argue its financial costs are minor, or who actually believe it could benefit the world, the expensive reality is being played out in all those envelopes being mailed out to insurance customers right now.
In its most recent inflation report, the Australian Bureau of Statistics reported insurance prices grew by 14.2 per cent over the past 12 months.
But the issues around insurance have been growing for some time. In the four years since mid-2019 insurance inflation has climbed by 24 per cent, about 50 per cent higher than the overall inflation rate.
Brisbane residents have been hit the hardest with insurance inflation, up 30 per cent, but no one has really been spared.
Only Canberra’s insurance costs have been anywhere close to inflation and that’s due to the territory’s decision, as part of a broader overhaul of its tax base, to axe all stamp duties on insurance in 2016.
That means that while the ACT doesn’t collect a cent in stamp duty on insurance, over the border the Minns government is forecast this year to raise $1453 per person from its insurance taxes.
Assistant Treasurer Stephen Jones fears the economic fallout from increasingly expensive insurance.Credit: Natalie Boog
State taxes are magnifying the inflation impact that has pushed up the cost of replacing a car or rebuilding a home. To make sure they have the funds to cover those higher-priced repairs, insurers have pushed up their premiums.
But these issues of inflation and tax pale in comparison to the underlying pressure caused by climate change damage.
The economy would come to a standstill without insurance. Without it, people could have their livelihoods and assets wiped away in an instant. Whole industries and communities would cease to exist, at huge cost to society.
For the system to work, insurers need pools of customers, spread out in different areas to cover the occasional disaster or accident. But if customers can’t afford to pay their insurance premiums, or the cost and number of those disasters grows faster than premiums, the whole business model collapses.
Insurance companies spread their risk through reinsurance companies. Reinsurers’ premiums for domestic insurers have spiked over the past two years because the cost of climate change disasters is hitting their bottom lines.
The fires that have devastated parts of Europe and North America mean global reinsurance premiums will be pushed up again over the coming 12 to 24 months.
The Wall Street Journal last month reported the growing number of American-based insurers who are pulling out of particular states because climate change is making parts of the country uninsurable.
Florida, Louisiana, California, areas of Texas and the Carolinas are getting battered so often by natural disasters that the premiums raised in these areas aren’t sufficient to cover the growing cost of repairing local communities.
Fire approaches the Greek village of Gennadi. This year’s fires across the northern hemisphere will push up reinsurer premiums that will then hit domestic insurance prices.Credit: Getty
Closer to home, the floods of 2022 that inundated parts of northern NSW and south-east Queensland were the fourth most expensive natural disaster in the world. Australian insurers suffered losses of about $5.7 billion, making it their most expensive hit in history.
Many people now find the cost of insuring themselves in parts of the country prohibitive, effectively making those areas uninsurable.
The Morrison government created the Cyclone Reinsurance Pool because parts of northern Australia have reached that uninsurable threshold. Taxpayers are supporting this reinsurer with a $10 billion federal government guarantee.
The invidious problem facing us all is that tackling the long-term driver of higher insurance premiums – climate change-amplified natural disasters – has been put off for way too long.
Credit is often described as the grease that allows the cogs of the economy to turn. Insurance powers those cogs. If the insurance sector fails, we are all in extreme financial peril.
What’s often forgotten about the Global Financial Crisis is that it was the near collapse of American International Group – the then $1 trillion insurance giant – that took a terrible situation to the brink of disaster.
AIG, which had both invested in dodgy financial products while also insuring those same dodgy financial products, needed a US-taxpayer bailout worth more than $US100 billion. If AIG had collapsed, it would have brought down a string of important American and European banks and, with it, perhaps the global economy.
The problems facing insurers dealing with climate change-related natural disasters are growing. They are becoming more expensive. Their reach – from the floodplains of our country centres to the tree-lined suburbs on the fringes of our major capitals – is widening.
If solutions are not found to the complex issues around insurance, the economy will shudder to a standstill.
Shane Wright is a senior economics correspondent.
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