Loyalty taxes and the other problems with insurance in Australia

Now, in my line of work I know a fair bit about insurance pricing, and was aware premium costs are rising steeply. Last year the Actuaries Institute found that the median increase in insurance costs Australia-wide was 28 per cent, and closer to 50 per cent in high-risk areas. Last year CHOICE magazine did a national survey of home and contents insurance, where 87 per cent of respondents reported their premiums had gone up with their most recent renewal notice.

Insurers say they paid out $36.5 billion in claims last year, and point to high inflation and increases in reinsurance costs as impacting on their pricing. The Actuaries Institute added that more frequent natural disasters, driven by climate change, was also a key driver. But I don't live in a flood or bushfire area, I've never made a claim on my policy, and I live in a safe neighbourhood.

So what's going on?

The insurance Code of Practice says insurers should explain to their customers how their new premium is calculated, but there is nothing on my renewal notice that explains the hike. On the phone, I'm told that premiums have gone up mostly because the costs of re-building a house and trades have risen. Apparently, I received a substantial discount when I chose my insurer last year - but those discounts are no longer available to me. Curious, I get a quote via my insurer's website pretending to be a new customer - and the price is $300 cheaper than my renewal notice.

Loyalty taxes are a known problem in insurance. In 2019, the ex-ACCC chair Allan Fels said that existing home insurance customers in NSW were paying about 34 per cent more than new customers. Fels estimated at the time that Australians could be paying as much as $3.6 billion per year in home insurance loyalty taxes.

Time to shop around. But getting independent, helpful guidance on choosing a level of cover to meet my needs at the right price is not straightforward. Online calculators recommended by the Insurance Council of Australia gave me wildly different estimates for the cost of rebuilding my home - and by wildly different, I mean by $600,000.

Adding to the confusion, key terms don't always have the same meaning across insurers.

Stormwater damage is a good example where what's covered depends on the insurer. When price becomes a key driver, people take a punt choosing coverage with limitations that only become apparent when making a claim.

Given the shocking stories we have heard at the ongoing parliamentary inquiry into how insurers responded to the 2022 floods, good customer service is also a priority for me. Again finding information about claims handling is surprisingly hard. CHOICE Australia's otherwise excellent insurance comparison doesn't include information about disputes or customer satisfaction. The Australian Financial Complaints Authority publishes data on complaint numbers - but it's hard to build a picture of what complaint volumes mean as it depends on total numbers of customers.

Four hours later, I've given up and just choose one. Far out, I can't tell if I'm looking for the right amount of cover, am comparing apples with apples, or that any of these companies won't fight me to the death when I want to make a claim. This can't continue.

Our homes are the most expensive purchase we ever make - we use a building inspector to make sure it is structurally sound, a solicitor to make sure title passes to us correctly, perhaps a broker to get us the best deal for our loan. But the information we get from insurers is opaque, incomplete, hard to understand and impossible to compare.

Insurance companies need to stop the confusopoly. Start with standardisation of key terms, providing detailed risk information, stop applying loyalty taxes to existing customers, standardise your sum insured calculators, improve claims handling experiences and tell me in writing why my premium has increased. People need insurance - and insurers need to make it easier for customers to buy products that meet their needs.