Why are your insurance premiums so high? Blame 20 years of allowing mergers

While the supermarket duopoly has received plenty of attention this week, market concentration in another key area of household expenditure is also exacting a substantial toll.

We pointed out a week ago that insurance giants QBE and IAG had revealed significant rises in their premiums, dividends and profits in their latest results. Insurance costs are one of the largest sources of lingering inflation — according to the Australian Bureau of Statistics (ABS), insurance costs rose more than 16% in 2023, the biggest rise since March 2001.

It wasn’t always thus. The ABS’ consumer price index data (CPI) shows insurance costs tracked the CPI from the early 2000s to around the financial crisis, after which they accelerated significantly only to flatten out from 2013-15, after which they began rising faster than CPI, until a surge over the past two years even higher than post-pandemic inflation. Since 2019, insurance costs have risen twice as fast as CPI.

There’s also been a steady increase in concentration in the insurance industry over the past 20 years. According to Australian Prudential Regulation Authority data, there were more than 140 entities in the whole insurance sector — household, car, personal, commercial, mortgage — as late as 2004. There were still 130 during the financial crisis. That had fallen to 113 in late 2013, and after that there was a steady drip of consolidation: 110 in 2016, 104 in 2017, 95 in 2018, 93 in 2021. Now it’s 90, a reduction of more than a quarter in the past decade.

Even in 2018, the Productivity Commission pointed out that:

General insurance markets are concentrated. In the home insurance, domestic motor insurance, travel insurance, lenders mortgage insurance and reinsurance markets, the largest four firms (which are not always the same four) hold market shares in excess of 70%. This concentration has increased slightly in recent years, mostly as a result of consolidation activity. The domestic motor insurance, travel insurance, lenders mortgage insurance and reinsurance markets are particularly concentrated, and while the domestic home insurance market is less concentrated, the two largest firms still account for more than half the market.

The ACCC pointed out in its report on the increasingly prohibitive cost of insurance in northern Australia that the problem is exacerbated by that market being even more concentrated than in the rest of Australia — and those active insurers were not actually bothering to compete with each other.

The four big insurers are IAG and Suncorp — the dominant firms — and QBE and Allianz. But because some insurers offer products under multiple brands, consumers may think they have a lot more choice than they actually do. Suncorp, for example, operates a “network” of nine brands including AAMI, GIO and Bingle. IAG operates not just NRMA Insurance but CGU, SGIO, SGIC and others. Many of these were once independent insurers eaten up by the big four in the 1990s and 2000s, leaving the illusion, but not the reality, of choice for consumers.

In more recent years the industry has consolidated further, with the big banks exiting insurance along with other wealth-management products after their gouging and rip-offs exposed them to too much media and regulatory heat.

Why are insurance premiums so high? Yes, the climate emergency is pushing us into a new era of more expensive insurance — or of government-backed insurance, as now applies to northern Australia by the still-developing reinsurance pool established by the previous government. Yes, the Black Summer bushfires and then La Niña made big calls on insurers’ balance sheets.

But drip by drip, acquisition by acquisition, the industry has been allowed to become more and more concentrated under our competition laws, which have minimal capacity to address the phenomenon of creeping acquisitions that end up delivering the oligopoly we have now.

It’s just one concentrated industry among many in Australia, each one exacting its own price every time we pay a premium, buy a product or pay for a service, a stealth transfer of income to big corporations. There’s more than enough of it to occupy the attentions of economists, Reserve Bank officials, policymakers and commentators, if they think it important enough.