Underpricing residential strata destabilises market
As was the case in North Queensland, there has been historical underpricing in the other states and a failure to accommodate the true cost of catastrophe exposure. The North Queensland market has corrected itself, but the other states – principally the east coast – continue to offer unsustainably low premiums.
Jones believes there are a couple of explanations for the distortion in the market. One is that the dominant player in the residential strata insurance market has a significant market share which allows for some diversity advantages i.e. a good geographical mix that spreads the catastrophe exposure. ‘However even allowing for diversification, all insurers are underpricing catastrophe exposure for residential strata,’ says Jones.
Another factor is that almost all of the residential strata insurance is underwritten via underwriting agencies backed by local insurers. Being a step removed from the insurers’ usual underwriting and pricing practices may have resulted in less scrutiny on actuarially-based pricing and underwriting governance.
’Underwriting governance, actuarial pricing and catastrophe exposure management is crucial to achieving long-term sustainable profitability for any portfolio of business. Zurich insurance is priced by our own actuaries. With 100 years in the business, we have the knowledge and ability to assess the risks. That’s why we invest in catastrophe modelling to see what the true exposures are,’ says Jones.
While exposure to cyclone risk accounts for much of the increased North Queensland residential strata premiums, Jones says that we are seeing more severe weather events generally because of climate change. These events are happening more often and causing more damage.
Then there is catastrophe exposure from earthquake.
‘Sydney and Melbourne are significant earthquake areas. What if we had an earthquake in Sydney and suddenly the industry realised we haven’t been charging enough for this cover. That would put the pressure on pricing and they’d be a knee-jerk reaction with premium increases. Zurich believes we should be looking at a more sustainable solution for pricing residential strata than the short-term ‘match the market’.
The Australian Government Actuary report from June this year on residential strata title insurance price rises in North Queensland, confirmed findings from his first report in late 2012 that the steep premium increases experienced in North Queensland were not unreasonably high.
‘Although the active participants in the NQ market appear willing to continue to accept risks, my judgment is that they are less inclined to actively compete for business on price. Accordingly, it has been possible for insurers participating in that market to achieve actuarially sound prices, largely unconstrained by competitive forces.’ As a result, he concluded that the NQ market was reasonably profitable, rather than highly profitable.
‘This is a desirable situation if you want to ensure the continued availability and affordability of the product,’ says Jones.
By contrast, the report states:
‘ . . . there is a reasonable likelihood that competitive pricing pressure in the east coast centres has resulted in prices which appear unlikely to be sufficient to generate the same expected return as NQ prices.’
With the substantial increases in property values and the rising numbers of people living in residential strata properties, Jones cautions that residential strata insurance pricing is something we need to rectify urgently to protect these consumers in the long term.
For further information contact:
Head of Marketing, Communications & Customer, General Insurance
Zurich Financial Services Australia
Business ph: +61 (02) 9995 1368
Zurich Insurance Group (Zurich) is a leading multi-line insurer that serves its customers in global and local markets. With about 55,000 employees, it provides a wide range of general insurance and life insurance products and services. Zurich’s customers include individuals, small businesses, and mid-sized and large companies, including multinational corporations, in more than 170 countries. The Group is headquartered in Zurich, Switzerland, where it was founded in 1872. The holding company, Zurich Insurance Group Ltd (ZURN), is listed on the SIX Swiss Exchange and has a level I American Depositary Receipt (ZURVY) program, which is traded over-the-counter on OTCQX. Further information about Zurich is available at www.zurich.com.