Australians are looking for cheaper insurance

Rising insurance premiums are forcing more consumers to seek cheaper alternatives, but analysts warn that the steep price increases could lead to increased scrutiny from regulators.

Macquarie analysts highlighted in a report to investors that while claims inflation continues to pose a challenge for insurers and push up prices, global reinsurance markets are starting to improve, according to AustralianThis environment has allowed smaller insurers such as Youi – owned by South Africa’s OUTsurance – and other competitors to take advantage, taking business from major players such as IAG, Suncorp, QBE and Allianz.

Youi, which entered the Australian market in 2007, reported a 24% increase in gross premiums in its personal lines in the second half of the financial year. That growth came at the expense of larger rivals, helped by premium increases passed on to consumers.

Meanwhile, major insurance companies such as IAG and Suncorp have also raised prices, with IAG increasing personal insurance premiums by 15.9% and Suncorp introducing a 12% increase.

Macquarie analysts noted that Youi’s growth was closely tied to a shift in the market, with customers looking for better deals while larger insurers are relying more on broad price increases. “As affordability becomes more of an issue, this could increase market churn and spur additional growth for competitor brands,” the analysts said.

Industry experts confirm that customers are increasingly comparing policies to take advantage of discounts offered to new customers, Australian reported. But insurers like IAG are holding strong, primarily offering better deals to long-term or multiple-policy customers rather than tempting new ones with cut rates.

The weakening reinsurance market also helped Youi secure favorable terms for its latest renewal. Reinsurance, which insurers buy to protect against large catastrophe losses, has seen prices rise by almost 40% over the past five years due to large payouts related to natural disasters. Recent floods in Eastern Europe are expected to put additional strain on global reinsurers.

Currently, reinsurance and catastrophe insurance account for almost 65% of the cost of home insurance policies in Australia.

Citi analyst Nigel Pittaway pointed out that both IAG and Suncorp are benefiting from strong profit growth because they pass on price increases faster than inflation. Over the past year, IAG shares are up 34% to close at $7.72, while Suncorp shares are up 31% to close at $18.35.

Pittaway also suggested that QBE, another large insurer, was undervalued despite a recent 11 per cent rise in its share price, which closed at $16.74. He described the valuation as “almost irreconcilable” in light of rival performance.

“The outlook for IAG remains good, with the full impact of recent price increases yet to be fully realised and claims inflation starting to ease,” Pittaway said AustralianHe added that while QBE shares continue to trade at low multiples, sentiment around the insurer may be overly negative.

Still, falling interest rates pose a risk to insurers’ profits, though Pittaway noted that higher rates, relative to inflation, could offset some of that pressure.

The surge in insurance prices is also raising concerns about possible regulatory intervention. A parliamentary inquiry into insurers’ handling of floods in 2022 is due to report by 18 October.

“There is nothing particularly worrying at the moment and the industry is hopeful that the reasons for such significant price increases are well understood,” Pittaway said.