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Why are property insurance premiums going up?

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Clients with property portfolios will feel the pinch as property insurance premiums continue to rise. According to the latest insurance industry reports, it may not ease for a while.

So, why are property insurance premiums going up?

Well, there are several factors at play. The five main factors are:

Low-interest rates
Inflationary pressure
Natural disasters
Reduced maintenance
Nervous investors

We’ll take you through how each of these elements impacts insurance premiums and what you can do to help.

1. Low-interest rates

Insurers are required under their Australian Financial Services Licenses to have capital reserves to cover the cost of claims. Additionally, they take out insurance policies to help cover the cost of significant claims that could eat up or go above their capital reserves.

Insurers buy their insurance from reinsurance companies who seek financial support from the Retrocessionaire market, otherwise known as the capital markets.

It sounds complicated.

In simple terms, every aspect of the insurance market relies on interest rates to help build money to cover claims. When interest rates are low, the pools of money don’t grow. Therefore, it pressures every level of the insurance market to raise premiums.

Eventually, the premium increases filter down to you at a business level.

2. Inflationary Pressure

The global increases in material and labour costs, plus supply chain issues, are driving up the cost of property repairs. So, whether it’s a partial or total property rebuild, property claims costs are becoming unpredictable and costly for all concerned.

Thus, insurers are unable to set property insurance premiums accurately. For businesses, it means higher premiums to cover worst-case scenario claims.

To assist, property owners can seek expert property assessments and develop regular maintenance programs to ease uncertainty for insurers. With accurate estimates and mitigation plans, insurers can feel confident and set appropriate policy limits and premium prices.

3. Natural Disasters

From Hurricane Ian and European windstorms to Australia’s bushfires and floods, the number of natural disaster claims is rising yearly. In fact, due to the extreme weather events of 2022, the global insurance industry is projected to see catastrophe losses of up to US$112 billion.

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The 10-year average for natural disaster losses was US$81bn. That’s a massive shift.

So, why does this matter?

It matters because the amount of money in insurance pots needs to be improved to cover catastrophic losses. When insurance is a risky investment for the capital markets (Retrocessionaire market), it reduces the money available to cover claims.

Once again, the costs will pass down the insurance market until they reach business owner premiums.

Therefore, we must tackle underinsurance. With accurate property assessments and business information, insurers and reinsurers can set realistic premiums while boosting investor confidence in the insurance market.

When there’s enough money in the insurance market, premium prices can start to ease.

4. Reduced property maintenance

Periodic maintenance by property owners reduces the need for expensive claims.

A recent claim example following a significant rain event led to multiple leaks at a licensed venue. The venue owners subsequently learnt that essential roof maintenance of around $12,000 would have mitigated the damage. Repairing the resultant water damage cost insurers $180,000 and a hefty hike in ongoing insurance premiums due to the claim.

It’s a harsh lesson to learn.

Regular upkeep of property assets is a cost-effective way to mitigate weather damage and save on premium costs.

5. Nervous investors

The riskier the insurance industry becomes, the less appealing the insurance market is to investors. Who wants to invest in a money pit with zero returns?

When the insurance market cannot raise capital to service insurance claims, there’s only one way for reinsurers and insurers to go. Unfortunately, that’s to pass the costs back down through higher premiums.

When insurers have accurate data from business owners, they can confidently calculate premiums based on known risks. Therefore, it’s in your best interests to declare everything an insurer needs to know about your business and its assets.

Need advice on insurance for your property portfolio?

Clear Insurance advisers use over 75 years of commercial insurance expertise to advise business owners with multiple properties and complex insurance needs. Our risk review provides a detailed analysis of your existing insurance programs against your business risk profile to ensure you have the most appropriate insurance program for your needs.

General Advice Warning: This advice is general and does not take into account your objectives, financial situation or needs. You should consider whether the advice is appropriate for you and your personal circumstances. Before you make any decision about whether to acquire a certain product, you should obtain and read the relevant product disclosure statement.