Image: Aria Property Group
Insurance premiums continue to rise in 2019 as Strata Insurers attempt to return their loss ratios to profit.
Underwriters have used the previous two years to take drastic corrective measures to remediate volatility and increase profitability to their portfolios. Even ‘vanilla risks’ saw an increased premium by more than 10% year on year after the Insurers incurred multiple years of underwriting losses in strata.
Strata follows the Australian and international general insurer market cycle. Insurer’s recent results indicate that their remediation actions combined with increased excesses are now yielding positive underwriting results for some strata insurers. However, two of the biggest strata underwriting agencies appear to still require modest rate increases of upwards of 15% in 2019 to balance their books and return a profit for their existing or new Insurer security.
What drives premium increases?
- The volatile claims of recent years across all property insurance with Cyclones Penny in December and Trevor in March impacting Northern Queensland and Northern Territory have reinforced Insurers’ reluctance to increase their risk appetites. Some Insurers are even deliberately pricing themselves out of North Queensland by doubling or tripling premium renewal terms to exit from high hazard areas. Heavy flooding in Townsville in February, with an estimate of $887m in insured losses, coupled with regular storm events and bushfires in the southern states, have all impacted property Insurer’s profitability.
- There is continued nervousness around combustible cladding exposure following Grenfell and the recent Victoria Lacrosse Tower court case, which identified the liability of consultants across the building chain, including building surveyors, architects and fire engineers for failure to exercise reasonable care. Insurers have been looking at a 200% to 300% increase on premiums for cladding risks, and many Insurers are now either excluding cladding related exposures entirely or offering limited perils with a minor write-back for legal defence costs.
- The simple rule of supply and demand with fewer Insurers now competing for strata premium, means premiums will rise in response
- Existing Insurers changing preferred risk appetite. In the last few years, there has been a shift in Insurer appetite with Insurers being very selective of what type, size and construction materials they wish to underwrite. This has limited the previously broader market, thereby driving premiums up.
- Insurers rely on investment return as well as underwriting profit to provide a return to their investors. Over the last few years, investment returns have been weak as has underwriting profit, and these factors combine to see premiums increase.
Where are we on the Insurance market cycle?
We are currently at the stage where risk selection by Insurers is more acute, and rates are rising strongly. We expect Insurers will take at least another 18 months (or more depending on future claims) to return to underwriting profit. This will then see more capital flowing to the market, which in turn will see more competition that will eventually lead to a fall in premiums.
What premium increases should we budget for in the next 12 months?
If your Body Corporate is claims-free and continues to be, it would be prudent to budget a premium increase of 10- 15%. If you have an adverse claims history, then as a general observation you should allow for a budget increase of 25%.
Author: Honans Insurance Group