Spreading The Risk !

It seems inevitable that the premiums we pay for house insurance will increase sharply when the annual renewal falls due.  The insurance industry has taken a walloping on a world wide basis from out of control fires in many countries and from  hail and storm damage that has cost them billions

Insurance companies are in business to make a profit and their shareholders expect dividends. They spread their risk load by buying what is called " reinsurance " whereby they accept a share of damage claims in other countries.  There is safety in spreading the load because rarely do many countries suffer the same storm event at the same time.

The basis of insurance is that the premiums of the many cover the loss of the few.  Every time a number of policyholders fail to renew that pool grows smaller and premiums have to rise, and this is at a time when the house price bubble continues to rise and wages remain static.  It seems inevitable that more people will claim that their insurance premium is unaffordable - and drop their cover.

This enigma falls more heavily on those entering the home ownership market.   Usually they have secured their home with the minimum deposit and consequently they are struggling to meet the mortgage repayments.  It is a loan requirement that the loan is secured by the integrity of the house being covered by insurance and paying this is the responsibility of the new owner.

When an owner is faced with the prospect of defaulting on either the mortgage payment or the insurance renewal, the choice is obvious.  Should we encounter even a small economic recession a huge number of mortgages will be pushed over the economic edge, resulting in repossession.  That could trigger a calamitous drop in home values across the board and bring many mortgages above the value of the property market.

There could be no greater damage to the Australian economy than the collapse of  property prices.  The home we own underpins the wealth of the average family and is probably the most valued asset they will ever own.  As we learned at the 2008 recession, a house is only worth what someone else is prepared to pay for it and when it is a " buyers market " that price drops significantly.

The statistics on house fires in the past was fairly static. Thanks to an efficient fire brigade few house fires are a total loss but we now have a hotter, drier planet and fires may now encroach right into the city perimeter. An ember attack can burn homes well ahead of the fire front.

Sadly, the funds that underpin fire fighting services rely on a tax that applies to insurance premiums. The uninsured are getting the services of city fire brigades and the heroic volunteers who give untold time and effort to fire control by the RFS without making any financial contribution.

If the government chose to spread that load by dropping the tax on insurance premiums and adding it to property rates and taxes it would make fire insurance cheaper and attract more customers.  The way fire services are funded at present is inequitable.  The fire services respond to all callouts without discrimination and it would be fair if that cost was shared by every household, not just the households with an insurance policy.

Anything that encourages homeowners to insure helps spread the load  !