Duopoly drives rising insurance costs

'Bill shock" normally refers to the unpleasant experience of receiving an enormous phone or electricity bill. But it could just as easily apply to insurance.

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.