Duopoly drives rising insurance costs
Premiums have been rising at more than twice the rate of inflation for several years, and the cost of home and car cover is tipped to jump another 10 per cent this year.
When insurance companies explain these increases, they often point to things outside of their control. A spate of natural disasters in recent years, for instance, has pushed up their costs from paying out claims. The cost of reinsurance - where the companies pay another party to take some of the risk - has also risen.
However, there's another force pushing up the cost of insurance that the companies are much less keen to acknowledge: lacklustre competition. Australia's market for home and car insurance is a classic duopoly - economist jargon for a market dominated by two companies.
The industry giants are IAG, which owns brands such as NRMA, RACV and CGU, and Suncorp, which is behind names such as AAMI, GIO and Apia.
Between them, these two companies control 65 per cent to 70 per cent of insurance products sold to consumers.
Instead of all-out competition based on who has the best-value product, they prefer to differentiate themselves from rivals through brands, or different services.
For customers, it means there is less competitive tension than if the companies were competing purely on cost.
This is what's happened recently, much to the benefit of the insurance companies' bottom lines. Of course, it's unlikely profits can keep growing so strongly, because competitors will seek to get in on the action. So how do the dominant insurers get away with imposing such large price rises on their customers?
There are "challenger brands" popping up: Coles and Woolworths now sell various insurance products, for instance. But it takes time for these new entrants to influence prices across the market, because they are still relatively small.
Online price comparison websites are also a great force for competition. But they haven't really taken off in insurance. Over time, it's likely the internet will help bring about more competition in insurance, which has happened in Britain, but don't hold your breath for a fall in prices. Aanalysts say it could be another few years before the smaller rivals start to make a meaningful difference to the premiums charged by the dominant insurers.
Frequently Asked Questions about this Article…
Premiums have been rising at more than twice the rate of inflation for several years and are tipped to jump another 10% this year. Insurers point to higher claims costs after a spate of natural disasters and rising reinsurance costs. The article also highlights that lacklustre competition in the market is an important driver of higher insurance prices.
A duopoly means a market dominated by two firms. In Australian home and car insurance, the industry giants are IAG (which owns NRMA, RACV and CGU) and Suncorp (behind AAMI, GIO and Apia). Together they control about 65% to 70% of insurance products sold to consumers.
Rather than competing purely on price, the two big insurers tend to differentiate through brands and services. That reduces competitive pressure to lower premiums, which has helped boost insurers' bottom lines and contributed to the recent large price rises for customers.
Yes — insurers commonly cite natural disasters driving up claims costs and higher reinsurance prices as causes of premium increases. The article stresses these are real factors, but notes there is another important, often underplayed factor: weak competition in the market.
Challenger brands such as Coles and Woolworths are entering the insurance market, but the article says they are still relatively small. It will take time for these new entrants to influence prices across the market, so any downward pressure on premiums is unlikely to be immediate.
Comparison websites are a powerful force for competition in general, but they haven’t really taken off in the Australian insurance market yet. The article notes the internet could increase competition over time (as happened in Britain), but analysts expect it could be a few years before comparison sites and smaller rivals meaningfully lower premiums.
The article explains rising premiums have benefited insurers’ bottom lines, supporting profit growth. However, it also notes that such profit growth is unlikely to continue unchecked forever because competitors will try to enter the market. Investors should therefore watch premium trends, claims costs from natural disasters and reinsurance pricing as factors that drive insurer earnings.
According to the article, meaningful competitive pressure from smaller rivals and comparison sites could take a few years to emerge. The small size of new entrants and the slow uptake of price-comparison tools in insurance mean any substantial easing of premiums is unlikely to be immediate.
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