I’ll admit it’s not news anyone wants to hear. In fact, it’s possibly one of the last things that anyone already dealing with rising cost of living challenges wants to face, but the reality is that property insurance premiums are rising.
And it’s not just landlord insurance that is on the rise – it’s all types of property policies including home and contents, commercial property, business and strata.
While it may be tempting to blame insurers for upping the prices, you should know that premiums are actually often influenced by what is happening in the community at large.
This includes the increasing severity and frequency of natural catastrophes and what are known as ‘secondary perils’, such as floods.
According to global reinsurance giant Swiss Re, natural catastrophes resulted in US$125 billion in insured losses in 2022.
The floods that ravaged NSW and Queensland in February and March 2022 took out the record as Australia’s costliest natural disaster.
With insured losses of $5.81 billion, the local catastrophe was also the costliest global natural disaster outside of the US last year (Hurricane Ian was the costliest event of 2022, resulting in insured losses estimated at US$50-65 billion).
With modelling showing these events will increase, some insurers are reassessing coverage and premiums to ensure they can continue paying out claims when these disasters hit.
In addition, in recent years, re-building costs (materials and labour) have been a significant contributing factor to premium increases. For example:
- Construction costs rose 11.9 per cent over the 2022 calendar year, according to CoreLogic’s Cordell Construction Cost Index.
- There is a severe shortage of skilled trades, which is pushing up wages, up 10.4 per cent over the September 2022 quarter (this means extra costs for tradesman), according to the Housing Industry Association’s Trades Availability Index.
Generally, the cost to replace a property that is damaged or destroyed today is greater than it would have cost even just one year ago.
Rent has also increased – the cost of renting a property now, in most states, is more than it was a few years back. For example:
- National asking rents rose 12.8 per cent over the 12 months to March 2023, with capital city prices rising even higher, up 21.4 per cent, according to SQM Research.
For these reasons (and more), claims will cost the insurer more, so the premium will be higher.
Premium prices ultimately need to factor in the cost insurers incur in providing coverage and service – things like business operating costs, paying claims and reinsurance.
What is reinsurance? Well, insurers cover certain losses, up to certain limits.
They then have reinsurance to cover costs that exceed these amounts.
With the increase in claims, comes an increase in reinsurance.
And ultimately, the cost of reinsurance must be factored into the premium charged.
All of these are combining to put upward pressure on property insurance lines.
Knowing the reasons behind the premium rises is useful if you find yourself having a discussion with your landlords. But how might your landlords respond to the price rises?
The answer is simple. They may look for ways to reduce their insurance costs.
That may be admirable in terms of the effort to be fiscally responsible, but how they go about making savings on their premiums could ultimately jeopardise their investment.
The most financially risky move of all would be to cancel their landlord insurance cover all together.
This would leave them exposed should their rental be damaged or destroyed, or if they were to suffer a financial loss stemming from a tenant-related matter or a public liability incident.
Some landlords may consider only keeping insurance cover for the property itself (e.g. building policy) and forgoing the protection afforded by specialist landlord insurance, namely cover for tenant-related issues such as loss of rent and tenant damage.
Landlords who think they don’t need cover for tenant-related matters may need to have a re-think.
Claims data from landlord insurance providers, like EBM RentCover, show that more than half of all claims lodged each year are for tenant-related issues.
Another cost saving a landlord may mull over is to lower the premium by downgrading the value of the cover.
They may do this by reducing the sums insured they have nominated for the building and/or in some cases the contents.
This puts the landlord at risk of underinsurance, which could prove very costly, if not financially devastating, if disaster strikes and they need to claim.
And finally, there’s the pursuit of cheap cover.
I’m not saying that landlords shouldn’t look for the very best value for money when it comes to insurance, but they should make sure they know what they’re getting – the inclusions and especially the exclusions – it’s often what’s not included that makes a big difference between policies.
There’s that old chestnut: you get what you pay for, and it applies to landlord insurance too.
Choosing a policy should be based on the insurance offering the cover needed, not just the price.
‘Cheap’ insurance may turn out to be very expensive down the track.
It’s unfortunate, but an economic reality, that property insurance premiums are rising.
While we don’t like rising our premiums, we are working to ensure we can continue to offer the products and services that landlords and agents need.
If you have landlord clients who are looking to combat premium price rises by reconsidering cover, I urge you to caution them to consider the possible ramifications for their investment and talk to their insurance provider before making any decisions.
