Demystifying risk based insurance

The latest term in the insurance world is ‘risk based pricing.’ Insurance has always been a game of risk, which is why actuaries exist, but until now the cost of this risk was spread across the country.  Premiums for zones more likely to experience earthquakes or flooding were essentially subsidised by zones with lower risk.

Insurers have recently relooked at their pricing models and major insurers such as Tower and IAG have signified that they are moving from a general – or community – pricing model to a risk-based one. IAG and Tower’s insurance will now be priced on a per property risk basis.

What effect this will have on insurance premiums won’t be fully known until all policies renew for their next 12 month period or people move. While many say that this is a sign of insurance companies getting greedier, it pays to remember that it’s actually a very logical model to look at risk on an individual property level. Insurers also have constraints of their own – they have to buy reinsurance on the global market, and while they try and operate with social responsibility, they also have financial responsibility as well.

What should property owners look out for?

It’s no secret that prices will rise for property related insurance, especially in higher risk areas. They have already been subject to a hike with the increases in the EQC and Fire Service Levy this year.

If you’re considering buying a home, it pays to consider insurance earlier in the process. As part of the checklist when viewing properties, make sure you input the sums into an insurer’s online calculator to ensure there are no hidden surprises. Definitely shop around and get two or three quotes.

CoreLogic advises home buyers to look at the highest premium and assume that all premiums will rise to that level in the next few years, so factor that in to your budget, along with increasing home loan interest rates.

If you have fallen in love with a property, higher insurance rates don’t mean you shouldn’t buy it, but a good rule of thumb is to factor in the future cost of insurance into the offer. CoreLogic also recommends making an offer conditional on satisfactory insurance.

A new era of insurance premiums is here, so even if you’re not looking to change address, now is a good time to review your home and contents policies to ensure you’re getting value for money, as well as being adequately covered in the event of a loss.

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