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2018 Cat Risk Seminar

Affordability of insurance for natural

perils

Tim Andrews

© Scott Reeves

This presentation has been prepared for the Actuaries Institute 2018 Catastrophe Risk Seminar.The Institute Council wishes it to be understood that opinions put forward herein are not necessarily those of the Institute and the Council

is not responsible for those opinions.

Copyright© Finity Consulting Pty Ltd 2

Affordability of insurance for natural perilsCatastrophe Risk Seminar 2018

Tim Andrews

Copyright©Finity Consulting Pty Ltd 3

Objective for this presentation

Assess the affordability of home insurance

premiums in Australia, and how this varies by

socio-economic group


• On average, the cost of home insurance is equivalent to around 0.8 weeks earnings

Average Premium $1,340*

AWE $1,632

Average number of weeks earnings needed

to pay insurance0.8

*Source: Premium data from Insurance Statistics Australia for buildings and contents combined. The premium data excluded stamp duty and levies and these have been added back on an approximate basis

Average cost of Home Insurance


Cost relative to earnings stable since 2013

0.00

0.10

0.20

0.30

0.40

0.50

0.60

0.70

0.80

0.90

1.00

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Buildings Premium Expressed as number of weeks earnings

NSW VIC QLD SA WA TAS NT

Source: Insurance Statistics Australia. Note: Excludes GST and stamp duty


Would this be

regarded as

affordable?

A house in Authurs Street, Ingham

Insurer Premium

AAMI $6,561

Allianz $6,327

APIA $5,163

CGU $3,619

NRMA $4,045

QBE $4,511

RACQ $4,604

Suncorp $5,590

Westpac $6,621

Property Field Property Information

Flood ARI 20

Building area 200.28m2

Maximum height 6.1m

Elevation of GNAF 15.11m

Eave height 4.8m

Distance to river 1,482m

Distance to coast 16,183m


How do the

demographics affect

the assessment of

affordability?

A house in Authurs Street, Ingham

Average Premium $5,227

Average Weekly Earnings $948

Average time to pay

insurance (weeks)5.51

SEIFA Decile 2

0

10

20

30

40

50

60

70

80

90

100

0% - 20% 21% - 40% 41% - 60% 61% - 80% 81%+

Number of homes by Income Band in SA1


How much is unaffordable?

➢ It’s personal : more challenging for lower SEIFA

➢ 15% of homes in financial stress

- Disposable income $1,067 pw- Spend $520 pa on home insurance- Difficult to increase spending

beyond 1 week’s earnings

Indicators of financial stress

➢ Assumed definition of unaffordable:

- Lower SEIFA > 1.5 weeks

- Mid SEIFA > 3 weeks

Source: ABS Household Expenditure Survey 2015-16


Approach – High level view

Used market representative basket and actual quoted insurer premiums for 10 leading insurers. 53,300

quotes across 5,330 risks.

Defin’d used to assess AWE and other socio-

economic measures for homes in basket


Approach – full population

Defin’d used for AWE

and other socio-

economic measures for

every home

Risk assessed

based on finperils


Results High Level View

Copyright©

Finity Consulting Pty Ltd

Number of weeks earnings needed to

cover home insurance

12

2524

2140

404

16859

0

500

1000

1500

2000

2500

3000

0 to 1 1 to 2 2 to 3 3 to 4 4+

Nu

mb

er

of

Pro

pe

rtie

s

Number of Week's Earnings Required

Profile of market representative basket

Copyright©


High level view of cost by SEIFA

13

Premium for each risk reflects average of 3 lowest insurers (out of 10 insurers)

Copyright©


High level view of cost in cyclone areas

14

Copyright©


Number of weeks earnings needed by SEIFA

15

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Low Mid High

Pro

po

rtio

n o

f H

ou

ses

SEIFA Tier

> 3

> 1.5

< 1.5

Suggests affordability

challenging for approx

4% of population,

allowing for home

ownership levels

Various surveys suggest

5-10% of homes have no

buildings insurance, and

underinsurance is

common


Results Full Population


Flood Hazard AWE Hazard vs AWEIn metro areas most

shape in hazard vs

AWE driven by

variations in hazard,

not AWE

Part of Brisbane – Hazard vs AWE


Flood Hazard AWE Hazard vs AWEBut AWE lower in

non-metro areas

where much of hazard

exists

Bundaberg – Hazard vs AWE


Summary of Hazard by SEIFA score for all

Australian properties

Flood risk higher for low SEIFA. Largely driven by higher country % and higher country flood risk.

Cyclone risk also higher for low SEIFA.

But storm and bushfire risk higher for high SEIFA properties

SEIFA

Decile

Average

Weekly

Earnings

% Country % Metro Flood ARI% Country

ARI < 50

% Metro

ARI < 50

finstorm

Risk Score

fincyclone

Risk Score

finfire Risk

Score

1 $868 54% 46% 213 6% 1% 1.06 0.34 0.04

2 $1,020 55% 45% 223 6% 1% 1.05 0.39 0.05

3 $1,129 53% 47% 236 5% 2% 1.05 0.42 0.07

4 $1,226 48% 52% 273 4% 1% 1.05 0.39 0.10

5 $1,312 43% 57% 278 4% 2% 1.04 0.40 0.10

6 $1,406 39% 61% 309 3% 2% 1.05 0.36 0.09

7 $1,499 31% 69% 377 2% 2% 1.05 0.31 0.10

8 $1,601 24% 76% 353 2% 2% 1.05 0.30 0.10

9 $1,750 15% 85% 358 1% 4% 1.10 0.27 0.09

10 $1,987 8% 92% 364 1% 4% 1.19 0.24 0.08


Conclusions

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In summary

• Affordability may be challenging for 4% of insureds

– mostly among lower socio economic groups

• May be a key driver of decisions to not insure, underinsure, or not insure for

flood

• The two perils generating the highest premiums for individual homes (flood

and cyclone) are biased towards lower socio economic groups – this

exacerbates the affordability challenge

21

Contact


Tim Andrews

Director

Email: [email protected]

Phone 02 8252 3385

Mobile +61 0405 189 549

This presentation has been prepared for the Actuaries

Institute’s 2018 Cat Risk Seminar. It is not intended,

nor necessarily suitable, for any other purpose.

Third parties should recognise that the furnishing of

this presentation is not a substitute for their own due

diligence and should place no reliance on this

presentation or the data contained herein which would

result in the creation of any duty or liability by Finity to

the third party.

Distribution and use Reliances & limitations

Finity wishes it to be understood that the information

presented at the Seminar is of a general nature and

does not constitute actuarial advice or investment

advice. While Finity has taken reasonable care in

compiling the information presented, Finity does not

warrant that the information provided is relevant to a

particular reader’s situation, specific objectives or

needs.

Finity does not have any responsibility to any attendee

at the conference or to any other party arising from the

content of this presentation. Before acting on any

information provided by Finity in this presentation,

readers should consider their own circumstances and

their need for advice on the subject – Finity would be

pleased to assist.

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