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Insurance company makes a profit despite floods: is insurance a rip-off?

·3-min read
floods and Suncorp sign
Suncorp’s profit is high and dry. (Source: Reuters/Getty)

“Devastating” is how Suncorp’s chair described the floods that hit eastern Australia in 2022.

Christine McLoughlin visited affected areas and told shareholders the floods were, “the largest weather event in Suncorp’s 100-plus-year history”.

But when you look at the numbers Suncorp reported to the market on Monday, you might struggle to spot the impact.

Suncorp runs both banking and insurance businesses. Banking was profitable, as you’d expect, but even last year, Suncorp still made money on insurance.

It sold more insurance in the 2022 financial year than FY2021: $9.3 billion in gross written premiums in FY2022, up from $8.6 billion the year before. Most astonishingly, Suncorp also had lower “net incurred claims”, down from $5.5 billion to $5.3 billion.

More money in, less money out. How do they do it?

While Suncorp paid out more claims to customers, (up from $6.3 billion to $7.6 billion) it also bought more insurance itself.

That’s right, insurance companies buy insurance.

The companies that sell insurance to insurers are called Reinsurers. Reinsurance covered Suncorp for a lot of the extra payouts, so Suncorp’s net incurred claims actually fell.

Suncorp did make less profit on insurance this year than last year - partly because reinsurance is expensive - but the biggest single reason was that its investments didn’t do well.

It lost $190 million on yields and investment markets thanks to falling stock markets, etc.

If an insurer makes money - even in the bad years, even in very bad years, even in a year where a once-in-a-century flood hits its biggest markets - you have to ask the question: “Is insurance a rip-off?”

The high cost of sleeping soundly

People buy insurance expecting that in quiet, uneventful years they pay more into insurance than they get out, and when things go bad they get more out than they put in.

Over time, they expect to pay insurance companies a bit extra than they ever get back, and that bit extra is the price of peace of mind.

But when insurers rake in massive profits year in, year out, you have to ask if they are charging more than they need to for peace of mind, or structuring insurance policies so they don’t always pay out quite what people expected.

The regulator, ASIC, wrote to insurers in 2020, telling them that many customers thought they had cover for things like floods but in fact didn’t have cover, and warned insurers it was their job to make sure “appropriate products are being sold to customers”.

Suncorp CEO Steve Johnston said the company’s number one priority was its customers.

There’s no indication that Suncorp’s profit comes via customers who think they have flood cover when they don’t.

“First and foremost, we have thrown our full support behind our customers, many of whom have been displaced by the far-reaching impacts of the La Niña weather pattern,” Johnston said.

But as natural hazards become more common, the price of insurance – and exactly what is covered for people in risky places - is going to be a bigger and bigger topic.

We need insurers to be profitable to continue to function, of course. But those profits shouldn’t come at the expense of customers.

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