Premiums for home and contents insurance in Australia are soaring, potentially widening coverage gaps and increasing financial risks for homeowners and lenders, a recent report from S&P Global Ratings warns.
The report, titled Australia’s Home Underinsurance Could Spread Risks, highlights concerns about the growing financial strain on households due to escalating insurance costs. It also predicts an increased likelihood of government intervention, particularly in high-risk areas where insurers are either limiting coverage or exiting the market entirely.
Angela Zhou, a credit analyst at S&P Global Ratings, emphasized that insurers are expected to continue raising premiums to maintain their margins and cover increasing weather-related claims. These hikes, while reflecting the higher risk exposure, could discourage new policyholders and exacerbate the problem of underinsurance across the country.
The surge in premiums is primarily driven by rising claims and mounting costs for insurers, including higher reinsurance expenses. These costs are expected to climb even further in the aftermath of major natural disasters, such as the recent wildfires in California.
In areas prone to floods and bushfires, insurance premiums are already high, and experts predict that rates will remain elevated for the foreseeable future. This is particularly concerning as Australian households are grappling with broader financial pressures, including rising interest rates, increased living costs, and sluggish wage growth.
The Actuaries Institute estimates that by March 2024, approximately 15% of Australian households—equivalent to 1.61 million people—will experience affordability challenges when it comes to home and contents insurance. Around 5% of these households also have a mortgage.
Zhou warned that some homeowners, particularly in high-risk regions, may be forced to scale back or drop their insurance coverage altogether in an attempt to manage other financial obligations. While mortgage agreements typically require borrowers to maintain insurance, banks have limited means to ensure compliance.
S&P’s stress scenario analysis indicates that a major natural disaster during a period of financial strain could lead to up to A$200 million in credit losses for the banking sector. While this risk may be manageable for major banks, it could prove more significant for regional lenders with concentrated exposure.
As insurers tighten coverage in high-risk areas, the Australian government may face mounting pressure to step in with support mechanisms, such as underwriting or guarantees. Programs like the cyclone reinsurance pool already exist, but S&P cautioned that such initiatives could create a moral hazard, masking the true risks of living in vulnerable areas.
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