It's never good when your home and contents insurance policy - one of your most important pieces of consumer protection - suddenly becomes unaffordable.

Since late 2011, CHOICE members and other consumers have been weighing in with hair-raising stories of premium hikes for home and contents insurance, mainly due to the addition of flood cover.

Letterbombs continue to arrive in the mail in the form of shocker renewal notices. One member saw their premium jump from $650 to $3767 a year in an area where flood mapping shows a 1-in-100 year flood risk. In another case, a member's cover costs had doubled in a similarly low-risk area in Goulburn Valley, Victoria. Another premium went from $850 to $4000.

No choice

The kicker is that policyholders haven't been given a chance to opt out of flood cover.

In cyclone-prone areas of Far North Queensland, consumer advocates we've spoken to say the situation amounts to "market failure" for the insurance industry.

A CHOICE survey of 1435 home and contents policyholders at a national level backs 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.

"As a veteran of 37 years in this industry I love, I am appalled at what is going on," one broker told us. "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."

More and more consumers are forgoing household insurance altogether due to rising costs, according to Roy Morgan research released in 2012.

The industry speaks

We contacted the Insurance Council of Australia (ICA) when we caught wind of this phenomenon and were told the sharp increase are the results of a wholesale reassessment of risk and an effort to renew the industry's capital reserves after one of the worst years on record and a resulting bad business outlook for the industry.

2011 – a very bad year

With eight officially declared catastrophes in Australia in 2011, the industry was expected to pay out more than $4.9 billion when the numbers are finalised - compared with $2.1 billion in 2010, an ICA spokesperson told us.

"The costs of natural disasters will inevitably have an effect on insurance premiums as companies adjust their pricing to take account of individual risk levels and increasing costs of reinsurance. The size of any premium change will depend on the insurer."

How about those profits?

An increase in premiums because of an increase in risk may sound reasonable, but apparently the addition of flood cover is not the only reason for the doubling or tripling of premiums. According to the ICA, it's also related to the industry's reshaping of risk assessment and attention to profit margins, irrespective of whether particular homes are at risk.

The ICA spokesperson also dismissed the idea of a 1-in-100 year risk and said flood mapping by itself was not a conclusive indicator.

Convenient reasoning

The insurance industry can't get its story straight when it comes to explaining the sharp premium increases. Mandatory flood cover is the pretext, 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. The explanation, it seems, is "just trust us!".

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.

Insurers weigh in

Insurance companies gave CHOICE a strikingly different take on premium increases compared to the consumers we've heard from. In some instances, the accounts of policyholders flatly contradict the version of events put forth by insurers. In addition to risk, NRMA, AAMI, Apia and RACV all cited the rising costs of reinsurance as an additional driver of premium increases.

  • NRMA acknowledged it uses council data to help determine risk, but said it also relies on "a range of other data, including specialist mapping, terrain and hydrology reports, water-course mapping and insurance information". The company claims it "reassesses individual properties at the time of renewal… [and] contacts all customers who receive an increase in their premium due to flood cover".
  • AAMI added flood cover to new and existing polices in February 2012 and told us it had updated its flood-risk information through "a combination of newly available local council data, as well as feeding in our own claims data gleaned from flooding events over the past couple of years. Our sophisticated pricing engine allows us to determine the level of flood risk each individual property is exposed to, and price that risk accordingly". The spokesperson added that policyholders can opt out.
  • Apia took a similar line to AAMI, saying "we work with industry experts who have a lot of experience in the area of flood risk to understand the level of differences between each individual property. This additional information is over and above the local council information that is available through council flood maps." Apia policies have included mandatory flood cover since the early 2000s, but the spokesperson acknowledged that "there have been premium movements in the past year. With each natural disaster, more information becomes available and our previous assumptions are checked. This may result in a change in the way we determine the risk to a property, or properties."
  • RACV general manager Paul Northey said new premiums were calculated "for each individual property according to the risk of damage to their property from flood" after the company made flood cover a standard inclusion in January 2012. He also argued RACV uses a wide range of its own risk-assessment methods and regularly updates risk information, but acknowledged that "there will be some instances of individual properties where we have not taken into account the most recent changes to local circumstances". (The company offers a review process through which policyholders can question "individual assessments".)
  • CGU told us it added mandatory flood cover to policies last year "following feedback from our customers and business partners. The decision not to allow opt-out was based on our own research that showed those most in need of flood cover were also those most likely to choose to go without." The company says the 15% of policyholders who were deemed high risk "were advised of the reasons behind the decision". Like the others, CGU maintains it relied on existing flood data as well as "drawing on our own research, including the assessment of existing topographical and hydrological maps, water-flow maps and accumulated insurance data". CGU was one of the few companies we spoke to that said recent premium increases had nothing to do with offsetting high claims payouts. "We don't recoup past claims costs. CGU's premiums reflect the risk posed to the property being insured."

Consumers weigh in

  • CHOICE member Shirley B is still at a loss as to why her NRMA premiums went through the roof. "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 similar stories. 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% 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 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%.

Where's the data?

The ICA has suggested policyholders don't have a right to know which assessment methods may have been used or whether they were fairly applied. "Insurers base their pricing on factors and data each company deems appropriate," the spokesperson said. The lack of transparency isn't much help to current or future homeowners, since any new risk information dug up by insurers is not passed on to homeowners, local governments, or the even insurance industry's National Flood Information Database (NFID).

NRMA told us "the data we use is very complex, and we overlay different types to give us a complete picture of the risk. For this reason we do not share our data." CGU was blunter, claiming that "to protect the integrity of our investment we do not place this information into the public forum as we do consider it commercial-in-confidence". AAMI and Apia maintained they share such information selectively.

The ICA confirmed that the NFID is limited to publicly available information from local and state governments and "insurer-owned data" is not shared. Such opacity runs counter to the ICA's call for greater data sharing, an appeal that appears to be a one-way street. "If a consumer has evidence their property may have been incorrectly assessed and is in a low-risk flood or fire area, they are encouraged to present this information to their insurer," the ICA said.

Survey says

CHOICE conducted a survey of 1435 home-and-contents customers at a national level in November 2012. The results are overwhelmingly consistent with what we've heard from consumers.

The lowdown

  • Insurance companies across the industry have been substantially raising some home-and-contents premiums, usually without giving a reason. If one was given, it was almost always flood-related.
  • Only a minority of policyholders who've seen a flood-related increase understand their properties to be at any risk of flood based on local government or other information.

The breakdown

  • Out of the 1435 surveyed, 829 were aware of a premium increase in the renewal notice they had received in the past year.
  • 60% who noticed a premium increase did not recall being given a reason for the increase.
  • When a reason was recalled, it was nearly always related to flood cover - and the mandatory addition of flood cover was the most common reason given.
  • Of the 286 participants who remembered a flood-related reason being given for their premium increase, just 71 (or 25%) understood themselves to be at potential risk of flood based on local government or other information; and of these, only 16 (23%) understood their level of risk to be "high".
  • Customers of GIO, API and Apia were most likely to have noticed a premium increase.

CHOICE verdict

CHOICE and the ICA see eye-to-eye on one key point – consumers can and should exercise their freedom to terminate their relationship with their current insurer in favour of a better deal if the premiums they're being asked to pay don't make sense for their particular circumstances - though homeowners at genuine risk of flood should always make sure they are properly covered.