Home and contents premium hikes

Why is the insurance industry playing fast and loose with the flood cover issue?
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01.What's the story?


We've looked into the role flood cover has played in a recent pattern of premium hikes in home and contents insurance, including:

as well as giving a breakdown of the results of our own insurance survey.

Credibility check

The insurance industry can’t get its story straight when it comes to explaining the shocker renewal notices that landed in mailboxes throughout 2012. Many policyholders who’ve contacted CHOICE say the massive premium hikes to their home and contents insurance have come with the addition of mandatory flood cover or a repricing of existing cover, but companies have been cagey about how they’ve determined the risk. Worse, it’s not clear that risk has anything to do with it.

When we asked the Insurance Council of Australia (ICA) about the outbreak of premium increases early last year, the peak body cited, among other things, the industry’s need to shore up profit margins after a run of hefty natural disaster payouts. At the same time, though, the ICA claimed “policyholders in high-risk flood areas may see the recent inclusion of flood cover in their policies, and a move towards risk rating their area, reflected in higher premiums”. If companies have been using new techniques to assess risk, they haven’t filled policyholders in on the methodology. An executive manager at one major insurer told us some companies were using Google Maps, hardly a precision tool for predicting water flow.

Nonplussed policyholders

CHOICE member Shirley B is still at a loss as to why her NRMA premiums went through the roof in 2012. “I had no contact from the insurer initially other than receiving the excessive bill,” she told us. “I was absolutely shocked. We have lived at this property for more than 30 years and never been flooded, and to my knowledge the property has not flooded previously.” When Shirley called NRMA, the initial explanation was that the company had used local council information to assess the flood risk. But then a different company rep called back shortly after and said the increase was necessary due to the high number of claims after the Queensland floods and other natural disasters. Shirley ended up dropping the expensive flood cover but was further confused when she discovered her neighbour’s premiums, which included flood cover, were far lower.

We continued to hear such stories throughout 2012. Justine W said AAMI added flood cover to her policy in May last year but maintained it wasn’t the reason her premium jumped 100%. “There was no information from AAMI regarding any risk assessment. I had a surveyor from the council knock on my door after the commencement date of my policy to ask permission to survey for flood levels, but this was well after my premium had increased and well after I’d been told I was covered for flood.” Rosie G’s explanation from NRMA of why her home insurance went up 45% last July left a particularly sour taste. After explaining the company had reviewed certain “rating factors” before raising the premiums, NRMA claimed they weren’t “able to give any specific details in relation to what particular rating factors have changed as information you have requested is only available to our underwriting department and is not accessible to anyone outside that area”.

David P contacted us in October after his RACQ home and contents premiums jumped 500%. “RACQ didn’t make us aware of any of their flood risk assessment techniques. They have not used the best available information, otherwise they’d know our house was raised under a state and local government joint flood mitigation program.” When David asked RACQ to review it, the company immediately dropped the rise to 450%.

As well, results of our nationally representative survey of 1435 home and contents policyholders back up the contention that insurance companies have been using the flood cover issue as a pretext to raise revenue, get rid of customers, or both.

Systemic issue 

In addition to many other similar tales involving a range of companies, we received many emails from members outlining comparable scenarios and naming providers such as GIO, RACV, RACQ and Westpac. The stories point to a widespread pattern.

“As a veteran of 37 years in this industry I love, I am appalled at what is going on,” one broker told us in February last year. “A ‘take it or leave it’ mentality is happening with insurers, who are purposely pricing themselves out of certain postcodes, namely potential flood and water damage claims, so that they can keep the ‘good’ clients and dispense with the ones who may cost them in the future.” Perhaps not coincidentally, the explosion in premiums was accompanied by a blowout in general insurance disputes lodged with the Financial Ombudsman Service, which saw a 35% increase in 2011-12. In an equally disturbing and possibly related trend, more consumers are forgoing household insurance altogether due to rising costs, according to Roy Morgan research released in November last year.



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