Why do premiums change?

Insurance is not immune from cost pressures, so sometimes premiums need to change. Premium adjustments respond to several different factors. Read on to find out what these are.

Landlord insurance. You know it is necessary. But how often do you stop and consider how it works and what determines its cost?

Let’s start at the beginning – what is insurance?

Insurance is ultimately a risk transfer. You relieve yourself of risk (and worry) and pass it over to an insurer, for a cost. If something unexpected happens – and it is covered under the T&Cs of your insurance contract – the insurance company pays you for the loss or damage.

If you are a landlord, consider what would happen if your investment property was severely damaged or destroyed by a fire. Without insurance, you would be left to cover the rebuilding or replacement costs yourself. With insurance, you have a financial safety net.

How are premiums calculated?

Determining landlord insurance premiums is highly complex. It considers many factors and uses statistics and probabilities to determine the risk, along with the likelihood of claiming. These factors are analysed, and a premium is determined for the insurer to assume those risks.

Essentially, it is all about risk. And an insurer will set the premium to reflect the risks posed. When the risk of accident, loss, theft or catastrophe is higher, often so too are the premiums.

Why do premiums increase and decrease?

Premiums are often influenced by what is happening in the community at large (e.g. the frequency and cost of claims, especially following natural disasters). In recent years, re-building costs (materials and labour) has been a significant contributing factor to premium increases. For example:

• Construction costs rose 11.9 per cent over the 2022 calendar year, according to CoreLogic’s Cordell Construction Cost Index.
• There is a severe shortage of skilled trades, which is pushing up wages, up 10.4 per cent over the September 2022 quarter (this means extra costs for tradesman), according to The Housing Industry Association’s Trades Availability Index.

Generally, the cost to replace a property that is damaged or destroyed today is greater than it would have cost even just one year ago. Rent has also increased – the cost of renting a property now, in most states, is more than it was a few years back. For example:

• National asking rents rose 12.8 per cent over the 12 months to March 2023, with capital city prices rising even higher, up 21.4 per cent, according to SQM Research.

For these reasons, claims will cost the insurer more, so the premium will be higher.

Premium prices need to factor in the cost insurers incur in providing coverage and service – things like business operating costs, paying claims and reinsurance. What is reinsurance? Well, insurers cover certain losses, up to certain limits. They then have reinsurance to cover costs that exceed these amounts. With the increase in claims, comes an increase in reinsurance. And ultimately, the cost of reinsurance must be factored into the premium charged.

Premium prices need to factor in the cost insurers incur in providing coverage and service – things like business operating costs and paying claims. It is important to understand that insurers are businesses, and they need to set premiums so that their businesses are sustainable.

What factors affect your premium?

There are several factors that may influence your landlord insurance premium.

Factors specific to properties include:

• property address
• type of building, age, condition, construction materials and property size
• risk mitigation measures in place such as security
• type of insurance (building, contents or both) and type of policy (based on how the property is let)
• sum insured
• level of cover, including any optional extras
• price of rent
• property occupancy (rentals that are vacant for long periods may attract higher premiums)
• personal and individual property claim history (previous claims and incident history).

Premiums are also impacted by other factors, including:

• claim frequency and cost following natural disasters, such as floods, storms, bushfires and cyclones – in Australia, this is a leading factor in rising premiums
• claims history and forecasting
• repair and replacement costs (e.g. the cost and availability of materials and labour)
• inflation and changes to government taxes, duties and levies
• rent prices – with higher rents charged, payouts for loss of rent claims are also higher
• insurer’s cost of doing business, including regulatory requirements
• other commercial considerations, such as investment returns or combating insurance fraud.

To summarise…

At the end of the day, insurance is about protection against the unforeseen. If you value peace-of-mind, reliability and financial security, then the cost of transferring risk is likely to be very appealing.

There is no doubt determining landlord insurance premiums is a complex exercise. At EBM RentCover we make sure our premiums are affordable and work hard to deliver reliable insurance solutions. We want landlords and property managers feel confident their property is well protected and we can continue to offer the service and support our clients have come to expect from us. 

*While we have taken care to ensure the information above is true and correct at the time of publication, changes in circumstances and legislation after the displayed date may impact the accuracy of this article. If you need us we are here, contact 1800 661 662 if you have any questions.