Fee Models Emerge as Solution to Cyclone Insurance Affordability Concerns
Fee Models Emerge as Solution to Cyclone Insurance Affordability Concerns
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The affordability of cyclone insurance in Australia’s high-risk zones remains a pressing issue, prompting some brokers to shift towards fee-based models.
This change is highlighted in the latest annual review of the cyclone reinsurance pool from the Australian Competition and Consumer Commission (ACCC).
Despite the establishment of the reinsurance pool in July 2022, which aimed to lower premiums in cyclone-prone areas, many consumers and businesses continue to face financial strain. The ACCC's report indicates that while large strata buildings have benefitted significantly, with premium reductions reaching up to 73%, overall savings for most customers have fallen short of expectations.
On average, strata premiums in medium- to high-risk cyclone areas have decreased by 7%, slightly trailing the 11% reduction in home and contents premiums in similar regions. This disparity underscores the financial burden still experienced by property owners, particularly in northern Australia, where the availability and competition in strata insurance remain critical issues.
The ACCC review also emphasises the role commissions play in inflating costs. With commission costs contributing to 15%-17% of average strata policy expenses in 2023-24, additional fees imposed by brokers and strata managers further augment the final amounts paid by consumers. This has led brokers to consider fee-for-service models to alleviate the financial pressure on clients in high-risk zones.
The National Insurance Brokers Association (NIBA) defends the indispensable role of brokers, especially in cyclone regions, where obtaining adequate insurance protection poses significant challenges. Brokers offer valuable expertise and advocacy required to navigate the limited and costly insurance options.
Additionally, small business insurance in northern Australia is highly intermediated, with commission costs making up 19% of the average SME policy expense, compared to 14% in other areas. While NIBA acknowledges the necessity to tackle insurance costs, it also expresses disappointment that the ACCC review does not address the impact of insurance-based taxes, which further diminish affordability.
NIBA advocates for a focus on reducing underlying risks as the most effective method to sustainably lower premiums. They continue to support initiatives that target the root causes of affordability challenges, thereby enhancing the resilience of communities most vulnerable to extreme weather events.
As brokers explore fee-based models, the insurance sector may witness notable shifts in how services are rendered, aiming to provide more equitable solutions for those in cyclone-affected areas. Moving forward, the industry remains committed to finding viable strategies to enhance the affordability and accessibility of essential insurance coverage.
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Dictionary
Grace Period
noun
A set amount of time after the premium is due during which a policyholder can make a payment without the insurance coverage lapsing.
