Want cheaper premiums? Reduce risk

It has been yet another busy summer for the insurance industry.

Bushfires and floods have struck once again, reminding us all just how risky it can be to live in a land of drought and flooding rains.

As we all set about putting things right for our customers, sometimes for the second or third year in a row, I’d like to take a moment to focus on insurance premiums.

I’m sure that every broker in Australia has been asked “Why has my premium increased?” hundreds of times over the past year.

It can be a tough question and there are many answers out there but they all boil down to one fundamental fact. Premiums have increased because the cost of claims has increased.

After all, insurance only shares financial risk within the community, it does not reduce those risks. The primary driver behind premiums is and always will be the amount of risk being shared and the dollar value of claims expected to be paid.

The recent run of large natural disasters has demonstrated the strong link between claims and premiums, with most of us receiving insurance renewals at a much higher rate than we’re used to.

With so many Australian budgets facing pressure from rising insurance premiums, there have been a number of calls to reduce insurance premiums through regulation or subsidisation.

False solutions

We know from international experience however that artificial premium reductions only serve to hide the problem, not solve it. The National Flood Insurance Program (NFIP) in the US is a good example of this.

While successful at reducing flood premiums, the program neglected to address underlying flood risks. The affordable insurance premiums available through NFIP had the perverse outcome of attracting continued development on flood-prone land and ultimately increased the number of homes and businesses exposed to flood risk.

The NFIP provides a real-world example of how regulation or subsidisation of premiums can remove an important price signal from the market and lead to higher claims costs (and premiums) in the long run. Recent flooding across the US has strained the program and the NFIP is now $US18 billion in debt.

Prevention, not cures

At Suncorp, we believe regulation or subsidisation of insurance premiums offers only short-term relief for the community. The long-term answer lies in improved natural disaster risk management.

Strong competition in the Australian insurance market means the link between claims and premiums is just as strong on the way down as it is on the way up.

As such, any improvement in the way in which natural disaster risks are managed will lead to lower insurance premiums. It comes back to the fundamental link between claim costs and premiums.

Suncorp has long history of advocating risk management as a pathway to lower insurance premiums. Our Vero Risk Management Advancer program is just one example of our commitment to promoting simple measures that reduce risks, prevent claims, and drive premiums lower.

Recently we released a white paper entitled Risky Business, which further explores the need to improve natural disaster risk management. The paper is available for download from www.suncorpgroup.com.au if you would like to read it.

Tricky question

As the busy end of financial year renewal period approaches, I know that in the coming weeks brokers will be asked, at least a few times, “Why has my premium increased?”

In answering the question you can demonstrate the true value of a local insurance expert by not only explaining the link between claims and premiums, but also highlighting how that link can work in the customer’s favour.

Brokers have a unique understanding of the risks their customers face, and using this knowledge can provide invaluable advice on how to reduce risks and unlock cheaper insurance premiums.

After all, the more people that understand the pathway to cheaper premiums, the quicker customers, brokers and insurers alike can enjoy the benefits of a continuously affordable insurance market.

Andrew Mair is the Executive General Manager of Suncorp’s Commercial Insurance Distribution.