High Insurance Prices Do Not Necessarily Lead to Market Failures: Productivity Commission

The Productivity Commission (PC) said high insurance premiums do not indicate market failures.

This comes amid concerns about the surge in home insurance unaffordability from consumer groups.

He cited the example of a pensioner in Townsville, Queensland, who was charged $16,000 (US$11,000) for home insurance.

"That is just one example. But then you go to flood areas where you've got consumers paying $20,000. How is that not market failure?" Shandiman questioned.

"The term market failure does have specific meanings. It doesn't mean that the market outcome is not the one that I want to see," he told a Senate Committee on Sept. 30.

"Market failures include monopoly or oligopoly, [and] market concentration that reduces the potential for competition."

The research manager noted that if premiums were very low in areas of high risk, it was likely that the insurance market was not functioning efficiently–an indicator of a market failure.

Turner said many factors contributed to the recent surge in home insurance prices.

"Insurance premiums consist of a combination of a number of factors, including natural disaster risk, but also things like the value of property," he said.

Turner gave the example of the value of property and construction cost.

As these two costs had risen significantly, he said the cost of insuring the property naturally increased.

"I suppose it's technically possible that natural disaster risks could go down, and insurance premiums would not necessarily go down at the same time because there are a number of factors that go into those premiums," Turner said.

"We're seeing similar sorts of problems in the U.S. For example, 60 percent of some states, like Louisiana, are uninsurable.

"So we need to accept that this is not simply a market failure that could be a self-correcting market problem.

"This is more [like] we are at a tipping point in a major change worldwide."

Furthermore, the professor said there was a weak link between risk mitigation and premium reduction.

She noted that there were not many things that individuals could do to significantly reduce their home insurance and that some of the mitigation measures were beyond people's capability.

"For example, the dams and the way that water is released and so forth are simply not within the capability of people," Jarzabkowski said.

"To say to them that that is a way to reduce their premiums is somewhat meaningless."