INVENT INNOVATE INSURE. Are insurers doing enough to make cover more affordable?
Insurance & Risk Professional, December 2007
To paraphrase Sir Isaac Newton, every action has an equal and opposite reaction: talking to an insurer about premium affordability and getting a lecture on tax is a prime example.
So entwined have tax angst and insurance affordability become, it’s hard to conceive how the non-insured and underinsured could be covered until a sledgehammer is taken to the myriad state government taxes.
Zurich Australia Chief Executive David Smith warmed to this theme at the NIBA Convention on the Gold Coast in October.
“People just think insurance is too expensive,” he said. “If you actually take a particular risk and you look at the risk premium and then you load on all the other taxes and other stuff you’ve got to collect… we’re acting as a surrogate tax collector.
“We’ve got to push the buttons and get that changed.”
Linking taxation with affordability allows insurers, and by proxy the Insurance Council of Australia (ICA), the luxury of shifting blame to state governments while absolving themselves of responsibility for fixing what is a multi-faceted problem.
Tax is a convenient excuse for non-insurance, but other pathways to improving affordability and the high rates of non-insurance and underinsurance in Australia are open to insurers.
These include greater education and awareness regarding insurance products, better access to insurance and innovation in policies. But critics argue these are largely being given lip service.
That is not to say the taxing of insurance products does not have a negative effect. Far from it – the insurance industry, including NIBA, has been in lockstep for years, lobbying for the removal of the fire services levy and stamp duties, which can increase the cost of insurance by up to 80%.
But many commentators, inside and outside the industry, cite lack of innovation in personal lines, particularly home and contents.
Fiona Guthrie, formerly a Consumer Director at the Banking and Financial Services Ombudsman office, says the insurance industry has not followed the lead of the broader financial services industry in tailoring products for particular socio-economic groups.
“Insurers haven’t thought about offering general products that might suit low-income consumers, for example. Why? Because they don’t take their social responsibility seriously.
“Where are the basic insurance products, similar to basic bank accounts?”
Consumer group Choice sees not just a lack of options but more critically a lack of clarity.
“It’s very difficult for the average consumer to estimate the correct cost of rebuilding their home,” spokesman Christopher Zinn said.
“Insurance is about sharing risk. In a situation where it is difficult for everyone to get their insurance right, it’s only fair to expect you will be fully covered.”
Ms Guthrie says insurers which present sponsorships as proof of social responsibility are missing the point – at the expense of those on lower incomes who are hardest hit when disaster strikes.
“Sponsorships, those sort of things, are building their brands,” she said.
“I don’t think that there has been enough thinking about lower-income markets and what these groups might really need.”
In the United Kingdom, for example, renters are being offered the option to take out a contents policy as they sign the lease. The additional charge is added to their rental payments.
“That’s the sort of thing we should be doing,” Ms Guthrie said. “There has to be some new and lateral thinking rather than ‘same old same old’.”
Perhaps surprisingly, many in the insurance industry agree. IAG Head of Government and International Relations Nola Watson told an ICA seminar in Melbourne that insurers were failing the social responsibility test.
“We as insurers are sometimes not targeting specific enough products to people that have low incomes,” she said.
“You can’t take a standard product and say here it is. It’s actually much more complicated than that.”
Ms Watson says many insurers have forgotten their integral role in the community. Moreover, the social responsibility argument can be won with sound economic arguments: there is a dollar to be made by offering niche products to low-income groups.
“Insurance really is a community product, and we shouldn’t shy away from it. There is a responsibility and an opportunity for insurers to look at this area of more tailored insurance products for those who have less financial means.”
The problem is that most insurers, and the industry body that represents them, are preoccupied in wringing their collective hands over excessive taxation.
The latest salvo in the debate was fired by ICA in its report on non-insurance, the most comprehensive study undertaken in Australia.
“The Non-Insured: Who, Why and Trends”, which was released in May, contains some interesting findings but ultimately fails to nominate a way forward that doesn’t involve removing taxes.
However, the ICA report does mark a watershed in the non-insurance debate. Only two studies have examined non-insurance previously: the 2003/04 Household Expenditure Survey by the Australian Bureau of Statistics and an NRMA study in 2001.
A report by the Australian Securities and Investments Commission (ASIC) investigated underinsurance after the 2003 Canberra bushfires, but the non-insurance argument has been based mainly on anecdotal evidence.
The ICA report provides a detailed snapshot of who doesn’t insure: the poorly educated, the young, the old, city dwellers, people from non-European backgrounds and those not in full-time work.
Prepared by the Centre for Law and Economics at the Australian National University, the report says about 23% of Australia’s 7.7 million households are uninsured.
Renters are among the worst: almost 70% don’t have contents insurance, compared with 12% of owners.
Not surprisingly, age and money are factors in taking out insurance. Between the ages of 18 and 24, more than 85% of people don’t have insurance, ostensibly because they have few assets to insure, or the money to insure them.
For adults 35 years old and over with an income less than $15,000 a year, 8.5% have no home and contents insurance. (This drops to 3% for adults on an annual salary of more than $100,000.) A low level of education is also closely linked to non-insurance.
Location is a revealing factor in non- insurance, with city dwellers more likely to shun insurance than those living the country life, despite the former dealing with higher crime rates.
Sydney’s inner south, west and south-west hold the nation’s top three spots for non-insurance, followed by Melbourne’s west and central Perth. Seven of the top 10 non-insurance pockets are in Australia’s two biggest cities.
One of the report’s most surprising findings was a link between non-insurance and ethnic background. Those from non-Western countries are more likely to be uninsured, particularly low-income earners – in some cases the margin is more than 20%. Even in higher-income brackets, non-Westerners avoid insurance at higher rates.
As for why people don’t take out insurance, the main reason is price.
“The costs of insurance relates directly to the issue of affordability,” the ICA report said.
“People may not insure due to the high cost of insurance relative to their own income or wealth. For many, the cost of insurance may be simply more than they can reasonably afford.” And all roads, including affordability, lead back to tax.
“High state taxes on insurance result in a greater number of non-insured people, and governments should investigate alternative means of funding,” the report said. “In particular, New South Wales and Victoria should, as Western Australia and other jurisdictions before them, consider more equitable and less (distorting) means for funding fire and emergency services.
“Given the societal benefits (in) having households insured, government policy should be focused on ways to encourage a broader insurance coverage, not discourage it.”
The case for tax reform is a strong one. The tax burden on insurance products is particularly bad in Victoria, where almost half the household insurance premium paid by consumers is tax.
Besides ramping up the cost of insurance, taxes compare poorly against international benchmarks.
New South Wales and Victoria have the highest tax rates on insurance products among developed nations, and only France is higher than the remaining states. The United States, United Kingdom, Ireland and Singapore are well below Australia’s percentage of tax-exclusive premium, and Japan and Hong Kong don’t tax insurance products at all.
Rates of non-insurance are also much lower in Australian jurisdictions that have dumped the fire services levy, as the report highlights.
“There is a notable gap between rates of non-insurance in (states with a levy) and those that do not have such a levy. This gap in the rate of non-insurance appears to occur across age groups, income profiles and stages of life.
“The effect of state taxes is much more noticeable for contents insurance, consistent with the view that households are more price-sensitive with regard to contents insurance.”
Insurance take-up has been shown to improve following the dismantling of taxes on insurance. An independent report by Sigma Plus showed more Western Australian residents were buying insurance after removal of the levy at the same time as the national trend for insurance purchases was in decline.
Access Economics founder Geoff Carmody says taxes on insurance products are a huge disincentive for people wanting to take out cover.
Describing the tax burden on premiums as “stupid, inefficient and archaic”, Mr Carmody says the three layers of insurance taxation – the fire services levy, stamp duty and GST – should be scrapped.
There is no mandate for governments to provide incentives for insurance take-up, but there is a very strong case for removing some disincentives.
“No Australian state or territory government taxes general insurance properly. Australia’s general insurance taxation is the highest in the world.”
If tax is a barrier to insurance, why isn’t non-insurance a problem for governments?
Put simply, it’s about dollars. Insurers say money that helps to bail out underinsured and non-insured residents after a catastrophe could be spent on services or lowering taxes.
In a budget submission to the Federal Government in December last year, ICA argued that rebuilding after a natural disaster is costlier in areas where insurance penetration is low.
“Individuals electing to not insure their assets will provide a burden to the rest of the community when the Australian Government, in the absence of private insurance, is faced with the position of taking on the responsibility of insurer of last resort,” ICA said.
“Arguably, while there may be an equity case for those members of the community who are financially disadvantaged to enjoy emergency support, open-ended assistance provided by governments in times of disaster is inequitable when provided to those individuals who are able to do so but choose not to responsibly insure their assets.”
However, underinsurance and non-insurance is not just about government money. It is also about insurers’ money.
A little-noted flipside of boosting insurance penetration is that it brings more cash into insurers’ coffers.
AAMI’s Public Affairs Manager Geoff Hughes acknowledges insurers have an economic imperative in reducing non-insurance.
“We would love to see everyone insured – and all insured with AAMI,” Mr Hughes quips.
“But we know that is not going to happen. There isn’t anything cynical in making the point that the people not insuring their assets are punting – big time. This is not an entirely altruistic thing we are doing, but I think everyone can be a winner.”
However, eliminating tax as a panacea for non-insurance and underinsurance is out of touch with reality.
First, non-insurance is still a problem among the states with lower taxes. NSW has a fire services levy and WA doesn’t, yet the difference in home and contents non-insurance is barely three percentage points.
Second, non-insurance is a global problem. Taxation aside, people choose not to insure for a variety of reasons. Affordability, although a big hurdle, is not the be-all and end-all. Apathy, ignorance and even a perception of insurance as a non-essential item also figure prominently.
Taxes in the UK are barely 5% of the total premium, but non-insurance is still a problem for insurers.
Mr Hughes says insurers err on the side of caution when it comes to personal lines, and innovation is rare.
“The industry is very conservative about innovating, but there are suitable policies. AAMI has a basic home and contents fire and theft policy designed for tenants. It has a reasonably low limit, but that’s perfect for young people.”
In response to ASIC’s 2005 Canberra bushfires report, which found homes were underinsured by up to 40%, AAMI launched a complete replacement cover that has so far gone unchallenged in the market.
“I think the others are waiting to see how we go first,” Mr Hughes said.
So what are some policy options for insurers?
The Association of British Insurers (ABI) is not only matching ICA in understanding non-insurance, it has taken a logical step towards finding ways of dealing with the problem.
An ABI report on non-insurance echoes many of ICA’s local findings, without the tax issue.
About 35% of British citizens on a low income, defined as less than £10,000 ($23,000) a year, have no insurance, and 20% of those on average incomes have no contents insurance.
The reasons for non-insurance are also similar. Nearly 30% of those on average incomes give budget constraints as reasons for not taking out insurance. More than half don’t see the need for insurance or are simply apathetic about it.
But where ICA is content to condemn taxes, the ABI is looking at solutions that deal with cause and effect.
The British group has started running programs on financial advice for school children and pensioners. “Older people taskforces” have also been established, involving insurers, brokers and charities in improving access to travel and motor insurance.
And from next year, the ABI will launch a campaign aimed at promoting insurance to those on lower incomes.
Alliances with housing associations and local government are being forged to develop affordability schemes, such as paying home and contents cover at the same time as rent.
In addition, the ABI is working with credit unions to develop new systems for those on infrequent incomes to encourage insurance take-up.
But will insurers take up the challenge issued by Ms Guthrie and others?
“I know a few insurance companies have made attempts,” she says. “But I suspect there is a long way to go.”
As Paul Keating once said: never come between a state government and a bucket of money. If insurers continue their relentless attack on taxation and neglect the important option of product innovation, it could be a long wait indeed.