1.6 million households now struggling with home insurance costs

More Australian households are struggling to afford their home insurance as premium increases continue to outpace income growth, a new report from the Actuaries Institute has revealed.

The research found that roughly 1.6 million households are currently experiencing home insurance affordability stress, which is defined as being when a month's gross income is needed to cover the annual cost of home insurance.

Sharanjit Paddam, the lead author of the report, notes that although most have been able to absorb the increases, the number of households experiencing stress has risen 30% in the last year alone.

"While insurance remains generally affordable for 85% of households, it's concerning that there's now 1.6 million households struggling to afford to insure their homes, up from 1.24 million a year ago."

The Actuaries Institute estimates that the average annual premium paid across Australia for home insurance is $2774. The difference between the average in each state and territory is quite considerable though, ranging from as little as $1781 in Tasmania to $4186 in the Northern Territory.

The affordability issue is also particularly pronounced in a few areas. The research found that half of households in southwest Queensland, the Northern Rivers in New South Wales and regional Northern Territory and Western Australia, are likely to be experiencing home insurance stress.

Why is the cost of home insurance rising?

So, on the one hand, affordability stress is increasing for many households because wage growth isn't keeping pace with the cost of home insurance.

But as the report lays out, the cost of home insurance itself is being driven higher - in large part - by the impacts of climate change and more frequent, severe weather events.

In fact, part of the reason why insurance is more unaffordable for households in particular regions of New South Wales, the Northern Territory, Queensland and Western Australia is because they're at greater risk of flooding or cyclone damage.

Paddam doesn't see the cost of insurance coming down any time soon either if the frequency and severity of the kind of natural disasters we've seen in recent years continues.

"Unfortunately, we expect this will continue because of the overall increasing risk of natural disasters associated with climate change, which will continue to put upward pressure on premiums."

Given that, chief executive of the Actuaries Institute, Elayne Grace, is urging both industry and government to collaborate more on sustainable finance measures, such as resilience loans, which can be utilised in the wake of disasters.

"We know as a country we need to manage the risk of the changing climate. Sustainable finance should be part of the solution. It creates a path forward for households, investors, insurers and lenders, and allows government to focus on households in most need and community-level measures."

Customers hit with record premium growth

To put the rising price of insurance into context amid the broader cost of living crisis, the latest Consumer Price Index data from the Australian Bureau of Statistics revealed that the insurance and financial services category was among the largest drivers of annual inflation.

The price of insurance and other financial services rose by 6.4% over the 12 months to the June quarter, while the overall CPI rose 3.8%.

And that's not just a jump in home insurance premiums. The insurance category also takes into account rises in contents insurance and vehicle insurance.

Adrian Taylor, executive general manager for general insurance at Compare the Market, says that consumers have been on the receiving end of a record level of premium growth across both car and home insurance in the past two years.

"We're talking double the increases that people are probably used to. So it's not uncommon now for customers to receive their renewal invitation and be seeing a $400, $500, $600 or $700 increase.

"And on the back of the broader cost of living crisis and increasing costs across just about all utilities and bills and other insurances, that just adds to the challenges that households are facing."

How can households save on their insurance costs?

Given these increases, Taylor believes that it's more important than ever for customers to be proactive about getting the best bang for their buck on their insurance. So to do that, he has a few suggestions:

1. Don't be complacent

"In my opinion, complacency is the biggest driver of customers paying too much and it's something that insurers absolutely love. So if you want to save, it's really important that you don't auto renew and you don't assume that your loyalty is being rewarded."

2. Cost doesn't always equal quality

"Don't necessarily assume that cheaper insurance is worse, but make sure you read the PDS. There's a tonne of different underwriters and brands out there that are trying to grow and would love your business."

3. Shop around

"When your renewal is coming up go online, compare multiple brands, make use of comparison websites and look at everything in the market. Planning ahead and just allocating 30 minutes of your time to do that could save you hundreds and hundreds of dollars."

4. Change your excess

"Ask yourself the question: how much would you be willing to pay if you had to make a claim? If that number's higher than what's on your policy, increasing your excess to that figure will save you a lot of money on your premium."

5. Consider your extras

"Other factors to look at are things like optional extras. If you're paying for optional extras, make sure you ask yourself if you really need those or if the additional savings in your pocket be more beneficial."

6. Evaluate your sum insured

"We know that many Australians are underinsured, but many are also overinsured which means they're paying for something they'll never get back, even if they need to claim. So make sure that the value isn't over or under and you've got the right insurance for you."

Plus, pick up the September issue of Money for our interview with Richard Joffe. The Honey Insurance CEO talks about dreams, dramas, and disrupting the industry.

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