Insurance rip-off…

Queensland hostel operator Brent Gemmell is unimpressed with the constant rise of insurance premiums…

What is happening with our insurance? As an industry we have been stung well over the top for a long time now. But this year we have reached new heights.  

We have been operating as a Backpackers/Hostel in Queensland for 15 years now, with not 1 claim! But still, due to being refused renewals for no valid reasons, we have had policies with 3 different insurance companies/underwriters in the last 5 years and with each one the premiums get higher and higher.

I heard through the grapevine we would have difficulties getting a reasonable deal this year, plus I got an email from our current broker warning of a major hike in the prices. So for the past 2 months I have had 4 brokers search the insurance world for affordable policies.

Result… The cheapest with the same cover as last year… 110% INCREASE in premiums.

Saying that, the most common response was a flat refusal. The most expensive you may be asking yourself… 230% INCREASE!!!!

I keep asking myself why?? I keep asking the brokers and insurance companies why?

Problem here is I can’t get any reasonable answers.

As a Backpackers/Hostel we are the most heavily regulated form of accommodation providers in the industry. We are scrutinised on an annual basis by the Fire Department and local council and the measures we have in place to comply with all the rules and regulations are thorough, to say the least…

I believe because we have become the lepers of the insurance world the underwriters/companies that will touch us have us over a barrel and think they can charge us what they like. And guess what… they are right. They do have us over a barrel. We can’t afford not to be insured and we can’t afford to be insured.

Please, any information on this most frustrating topic would be much appreciated.

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13 thoughts on “Insurance rip-off…

  • March 26, 2012 at 7:12 pm
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    I feel your pain, Brent, and it is partly due to the way we are viewed by the rest of the industry. We are hopeful the change away from using the word ‘hostel’ to describe our accommodation will assist us in finding better rates of insurance and a better over-all view by those who equate us with down-and-outers due to the “H” word. (Dunno what YHA thinks of this, but!!)

    I can`t even get cyclone insurance for my place, Brent, yet the premium cost me as much as last year, despite no coverage for these large storms…….You`re right and it will be the first thing I ask the next LNP Federal Government to look into when they win next year.

    Reply
  • March 26, 2012 at 7:12 pm
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    I feel your pain, Brent, and it is partly due to the way we are viewed by the rest of the industry. We are hopeful the change away from using the word ‘hostel’ to describe our accommodation will assist us in finding better rates of insurance and a better over-all view by those who equate us with down-and-outers due to the “H” word. (Dunno what YHA thinks of this, but!!)

    I can`t even get cyclone insurance for my place, Brent, yet the premium cost me as much as last year, despite no coverage for these large storms…….You`re right and it will be the first thing I ask the next LNP Federal Government to look into when they win next year.

    Reply
  • March 27, 2012 at 10:31 am
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    Insurance companies are essentially casinos by another name. They play poker with marked cards. To avoid a gunfight they must occasionally lose. They have clever seductive marketing and highly paid actuaries all collaborating to empty your wallet. I see it as the biggest legal scam of the last two centuries, and like you, Brent, I’m forced – by legislation – to roll the dice.

    Heavily regulated Industry, no claims in 15 years, and yet they jack-up your premiums and do so without a whisper as to why. And we wonder why we need a strong industry body.

    Insurance companies are also best friends of governments, so don’t expect any doors to open there.

    Reply
  • March 27, 2012 at 5:44 pm
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    Its the same for us with vessels. Our premiums go higher and higher while the value of your vessels drop! I heard one company had their fleet’s value drop by 50% this year.

    What with all of the extra costs coming such as carbon tax and super increases, it makes for a scary future. We really need to get all of the stakeholder tourism bodies and associations to band together and lobby for our future. We desperately need government to understand what is happening so we can brain storm real solutions to the huge amount of red tape that envelopes us all.

    As for the Insurance issue, it really needs a motivated government to look at the superior NZ system. In regards to liability their government pays the hospital bills, as it was found claimants only received 6% the rest went to lawyers, courts, insurance companies, ect ect. It is more cost efficient for the whole of the society to do it this way.

    Sadly Australia is set up in the USA model which has enormous costs in claims and in just how much it costs to insure. I can’t understand why our government has legislated this inferior system.

    It’s terrifying in our industry where there are so many potential areas where you can be sued. We have folders and folders of risk assessments hoping to cover every eventuality otherwise we are at fault, how can you cover every possibility? Our safety briefing go on and on and on, and could go on for the whole trip just to satisfy work place health and safety.

    Its complete madness this system we accept, especially when there is one right across the ditch!

    Reply
  • March 27, 2012 at 5:44 pm
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    Its the same for us with vessels. Our premiums go higher and higher while the value of your vessels drop! I heard one company had their fleet’s value drop by 50% this year.

    What with all of the extra costs coming such as carbon tax and super increases, it makes for a scary future. We really need to get all of the stakeholder tourism bodies and associations to band together and lobby for our future. We desperately need government to understand what is happening so we can brain storm real solutions to the huge amount of red tape that envelopes us all.

    As for the Insurance issue, it really needs a motivated government to look at the superior NZ system. In regards to liability their government pays the hospital bills, as it was found claimants only received 6% the rest went to lawyers, courts, insurance companies, ect ect. It is more cost efficient for the whole of the society to do it this way.

    Sadly Australia is set up in the USA model which has enormous costs in claims and in just how much it costs to insure. I can’t understand why our government has legislated this inferior system.

    It’s terrifying in our industry where there are so many potential areas where you can be sued. We have folders and folders of risk assessments hoping to cover every eventuality otherwise we are at fault, how can you cover every possibility? Our safety briefing go on and on and on, and could go on for the whole trip just to satisfy work place health and safety.

    Its complete madness this system we accept, especially when there is one right across the ditch!

    Reply
  • March 28, 2012 at 4:56 pm
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    Brent, we are insurance brokers who specialise in placing insurance for backpacker / tour operator type businesses.

    Unfortunately increases in insurance premiums are not contained to the backpacking industry and whilst the size of the increase you mention is atypical, it is not unheard of (but as I say, this is not contained to backpacker hostels). Claims figures show losses in Australia exceeding $5 billion since December 2010 with an astonishing 300,000 claims being reported from QLD & VIC Floods, Cyclone Yasi, Vic Storms, Perth Bushfires, Margaret River Bushfires and Melbourne Christmas Day storms alone. Add to that the claims that have arisen from the Earthquakes in New Zealand, the Japan Tsunami and Thailand Floods and you have an enormous impact on Worldwide insurance premiums.

    As I mentioned we specialise in your industry and whilst the cost of insurance particularly in North Queensland is becoming more expensive as insurers tighten their belts and become targeted about the places they wish to do business, it is still possible to buy insurance for backpacking hostels at reasonable rates, although each person’s circumstance is different and previous claims do make it more difficult though not impossible.

    If you need assistance you can contact us via Backpacking Queensland or ATEC.

    Reply
  • March 28, 2012 at 9:34 pm
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    @Andrew, those losses are a mere drop in the ocean and are based on recent events and do not reflect the accumulated asset base and profits of the insurance industry in Australia. And your figures relating to losses – according to the Insurance Council of Australia figures – are far from accurate.

    Given the spate of recent natural disasters I don’t see 300,000 claims as anywhere near astonishing. What could be deemed astonishing is an industry running for cover, and the weight of people who are falling through the cracks in your policies when they thought they were covered. Class actions will no doubt follow.

    Disasters and losses are part of your game. What’s disturbing is how you use them to significantly increase premiums where no increase is warranted. The insurance industry needs to take some of the pain – you can well afford to.

    Reply
  • March 29, 2012 at 9:46 am
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    I see a number of people have written but I thought I would try an explain why the increases. I start by saying that I do not sell insurance nor do I work for an insurer. I am a technical adviser on insurance and claims in particular.

    The earliest evidence of insurance dates back over 5,000 years where groups of people pooled the risk between themselves so that the entire community bore a small proportion of the losses but no one who participated in the pooling was completely wiped out. While the Chinese are believed to be the first to embrace this concept of pooling the risk and paying losses out of the pool other cultures such as the Babylonians, Egyptians, Greeks and many other cultures developed or expanded on the pooling concept against risk.

    Modern insurance continues this principle of pooling the risk but when catastrophes hit an area, it is possible that pool is not large enough to cover all the losses that arise. AMI Insurance in Christchurch is a recent example of this. AMI (no relation to Australia’s AAMI) was a Christchurch based insurer that had a huge market share in that town. When the Canterbury area was devastated by a series of earthquakes the insurer did not have enough reserves (a big enough pool) to meet all the claims and remain vialbe should another catastrophic event hit. Most insurers now spread their risk internationally to obtain as wide a pool as they can and if one area gets hit it does not wipe out the entire pool.

    Like any business is not a charity. It generates revenue and incurs costs to operate with the plan to make enough profit to attract shareholders to provide capital.

    In simplest terms, the revenue streams for an insurer come from two sources. Insurance premiums and investment returns.

    When investment returns are high insurers reduce their premiums in a free enterprise system and make up any underwriting losses with investment returns. The first problem for the insurance industry and all of us that insure is that investment returns have gone down considerably. Look at your own superannuation and you will see that the investment returns have gone down enormously.

    This has put pressure on premiums. Adding to this pressure is the operating costs of insurance. The biggest single cost to general insurance industry is claims. Australia and the rest of the world has been hit by a spate of natural disasters. Let me run through just a few.

    Australia:

    Queensland Floods $2,400 million

    Victoria Floods $122 million

    Cyclone Yasi $1,330 million

    Victorian Storms $412 million

    Cyclone Carlos (NT) $15 million

    WA Bush Fires $35 million

    Margaret River Bush Fires $52 million

    Christmas day storms (Melbourne) $772 million

    This is over $5 billion in one year on top of the normal day to day claims of house fires, burglaries, car accidents, burglaries, liability claims etc.

    But it is not just Australia. I have already mentioned the New Zealand earthquakes at around $20 billion, but they also had bad snow storms and Auckland had a tornado. (Townsville got hit with one only last week). but we had Hurricane Irene in the US, the Mississippi Floods, 43 major tornados and an earthquake. the losses in Japan have been horrific both in human life and insurance payouts. The Thai floods have also been estimated at over $35 billion in insured losses. Europe has had floods and storms and flooding and earthquakes in South America.

    These catastrophe losses have been some of the worst in recorded history and the insurance industry has paid out billions of dollars to indemnify business and home owners in all industries including but not limited to back packers.

    Lloyd’s of London, one of the world’s major reinsurers has just reported a loss of £516 million after paying out £12.9 billion in claims, £4.6 billion of which were catastrophe claims, the largest amount in Lloyd’s 324 year history.

    In some classes of insurance in Queensland insurers were paying out more than $115 in claims for $100 in premium received. It must be remembered that insurers also have to pay rent, salaries, electricity, meet compliance costs etc as does every business. This of course is not sustainable and if insurers and reinsurers did not increase premiums then insurers would not have the funds to meet on-going valid claims and in the worst cases go into liquidation.

    Every home owner and business will feel the effect of having to pay higher premiums. The backpacker industry is not being singled out.

    Now to the false logic of I have had no claims so my premium should not go up. This means that the insurer should collect the entire cost of increased claims costs from only those that made a claim. On that logic, you make a claim of $1,000,000 and the Insurer is required to recover that loss from that Insured alone. This destroys the whole 7,000 year old concept of everyone pooling the risk.

    During the 1990′s and early 2000′s we all had the benefit of cheaper premiums. We quickly forget that fact. The price of insurance has become unsustainable and regretably it has to go up by large percentages. This is all based on actuarial advice. There is still enough competition in Australia to stop price gouging.

    Governments do not help the situation by the highest level of taxation on insurance premiums in the world. As premiums go up the State and Federal Governments have an immediate win fall with higher GST and Stamp Duty collections. It is worse in NSW, Victoria and Tasmania (commercial insurance only) where they still have the draconian Fire Service Levy which in rural Victoria is a staggering 85% which means with the tax on tax on tax compounding effect, insureds are paying over 120% tax on their premiums.

    So what can be done? First work on reducing the risk in your business. Insurers will always reward better quality risks with lower premiums. A competent insurance broker can assist here.

    Secondly write to your state politician about the level of insurance taxes.

    Last but not least, please understand that the insurance premiums are not the cost of risk. It is the cost of transferring risk from you and your family to an insurance company. The cost of risk is much more and includes policy excesses, under insurance and self insurance. Ask yourself, if you are not fully insured and you do have a fire, storm damage or the like. Who is going to get what is left you and your family or the bank?

    What you should not do is reduce your coverage or sum insured. Murphy’s Law is alive and well. The next home or business owner that needs to make a claim could be you and during these tough economic times you need the best possible protection available for the full value of your assets and business income. 265,997 people claimed due to the catastrophes in 2011 alone.

    Reply
  • March 29, 2012 at 10:22 am
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    @ Allan, thanks for your participation, and I look forward to reading your blog. I went to a climate change conference some 4-5 years ago (I think it was a Tourism Transport forum initiative) and much of what you mentioned here was foretold in a presentation. In fact, cyclonic conditions in south-east QLD were touted by a presenter from the insurance industry as being the next major insurance event (until then the biggest event had been the Sydney hailstorm). Given the industry was aware of this some years ago I have to wonder why the definitions of flood and water damage are causing so much confusion and pain, and the perceived lack of preparation – in the context of premiums – by the industry.

    Reply
  • March 29, 2012 at 11:38 am
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    @Andrew, Allan, Greg – many risk factors cannot be reduced for those of us in cyclone/earthquake/bushfire/flood-prone areas and the startling fact in Australia is….THAT JUST ABOUT COVERS THE ENTIRE CONTINENT !!!! AND TASSIE!!

    When I lived on the Mornington Peninsula, the major fear was bushfire, then wild storms that did most of the damage, and then there were the regular tremors on the Nepean fault line or whatever it was called.

    Out at Burraboi, near Denilliquin, it was bushfire and floods, like what we have just seen on the Murrumbidgee and such like. Having lived in the Far North running Scotty`s, from 1987-2006, we had no cause to make an insurance claim over cyclone damage, coz they were all small or missed us. Then, BANG!!, 2cat 5`s in 5 years (Larry & Yasi)….

    As I pointed out above, I can`t think of ANYWHERE in Oz that doesn`t have an impending natural disaster possibly poised to strike in the immediate future.

    My grievance is A) Lack of Government support to make such premium rises manageable and B) the dopey Government agencies whose alarming Climate-Change-influenced coastal zoning maps, with totally unrealistic sea level predictions informing their heights, dimensions and conclusions, are what prove to be the main determining factor for insurance companies to apportion risk.
    A recent NSW coastal council`s decision on a beachside street of houses that are 7m above high tide mark is a stirling example of this ridiculous policy having real-time impacts on coastal dwellers.

    There are many cost problems in Australia that can be directly attributed to the ideology of the bureaucrats in certain Council and Government departments: the Qld, NSW and Victorian de-sal plants/multi-billion dollar white elephants are fine examples of what absolute dependence on ‘expert`s computer modelling’ can result in.

    I would ask, Alan and Andrew, if you would be so kind as to do some behind-the-scenes research & lt; how much has Tim Flannery`s river front home`s insurance premium risen?????

    Reply
  • April 2, 2012 at 11:25 pm
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    I am a broker. I have been working in the insurance industry for 24 years.

    As Alan said the insurance market, like the finance market, is international.

    Claims are one part of the equation but the ability of insurers to attract investment and return on those investments are important factors as well. In fact in the current phase of the insurance cycle I would say that investment earnings are at least as responsible for increasing prices as the relatively higher incidence of recent claims.

    The insurance market, like credit markets, are generally “loose” punctuated by sharp periods of “tightening”. You could ask 10 economists for an explanation for this and you would get 10 different answers, all wrong, so there is not much point in getting into that.

    When the finance market turns, banks contract to their lowest risk clients and dump perceived higher risks. Some of these decisions are buy the numbers but relationships have a lot to do with these decisions also.

    The same happens with insurers. The perception of risk has a lot to do with the ability and specialization of an insurer’s underwriting staff in a given industry and the quality of their underwriting file of information.

    Stick with insurers that have a good understanding of your industry, avoid insurers that jump in to an industry with a low price when times are easy because they will be the first to dump you when markets tighten.

    Even if an insurer you have been with for a long time does not repay your loyalty when times get tough, your continuity will make you a more attractive risk for other insurers. Insurers value loyalty in others even if they are sometime lacking in this area themselves.

    Have a lawyer redraft all your customer and supplier agreements every year and share these with your insurer.

    Provide as much information regarding your risk management planning every renewal. Build up currency with the insurer even when renewals are easy.

    Don’t involve 4 brokers. Four brokers are going to the same insurers anyway and quite frankly getting four different submissions from four different sources just pisses insurers off.

    Pick one broker you trust, make the effort to give them all the information they need at least 6 or preferably 8 weeks out from renewal, then let them get to work. If you want to check up on them ask to see their submission to insurers and a report on which insurer they approached and what all the responses were.

    Reply
  • April 6, 2012 at 4:49 pm
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    Thanks for the very informative history of the insurance industry. Relevance unsure, but interesting none the less.

    As far as risk assessment on an individual basis is concerned, would I love that. There are reasons why we have travelled 15 years with no claims. Valid reasons that should be considered when formulating a realistic premium. But this does not exist in the Hostel/Backpackers insurance market. Use the H or B word, throw in a bit of wood and presto…
    I know I’m not the only one (in our industry) with huge increases in premiums. But please name another industry as a whole who is dealing with at least a 100% hike.

    Cameron, please don’t lecture on the term loyalty. I would love to form a long term relationship with an insurance company where we love each other and treat each other with respect. But this is extremely difficult when you are dropped like a hot stone on a regular basis for no apparent reason.
    Don’t forget, I’m about to enter into my 4th relationship to cover the last 5 years plus the next 12 mths. Where’s the loyalty there.

    Involving 4 brokers and giving them 8 weeks to come up with the best agreement was sound business. You shop around for the best deals in every other industry I can think of. The insurance industry is no exception. I would encourage everyone to do so. If I’d shown loyalty to my previous insurer I would be looking at a 230% increase in premium costs. By shopping around and getting different brokers to tap into their own network base and connections this was reduced to 110%. Still highway robbery, but a huge saving.
    The very last thing that was concerning me was whether I was going to piss off an insurer.

    This topic along with the commission and ethics debates are prime reasons why we as an industry need a strong, collective governing body. A voice to be listened too and the clout to back it up.

    Reply
  • April 6, 2012 at 4:49 pm
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    Thanks for the very informative history of the insurance industry. Relevance unsure, but interesting none the less.

    As far as risk assessment on an individual basis is concerned, would I love that. There are reasons why we have travelled 15 years with no claims. Valid reasons that should be considered when formulating a realistic premium. But this does not exist in the Hostel/Backpackers insurance market. Use the H or B word, throw in a bit of wood and presto…
    I know I’m not the only one (in our industry) with huge increases in premiums. But please name another industry as a whole who is dealing with at least a 100% hike.

    Cameron, please don’t lecture on the term loyalty. I would love to form a long term relationship with an insurance company where we love each other and treat each other with respect. But this is extremely difficult when you are dropped like a hot stone on a regular basis for no apparent reason.
    Don’t forget, I’m about to enter into my 4th relationship to cover the last 5 years plus the next 12 mths. Where’s the loyalty there.

    Involving 4 brokers and giving them 8 weeks to come up with the best agreement was sound business. You shop around for the best deals in every other industry I can think of. The insurance industry is no exception. I would encourage everyone to do so. If I’d shown loyalty to my previous insurer I would be looking at a 230% increase in premium costs. By shopping around and getting different brokers to tap into their own network base and connections this was reduced to 110%. Still highway robbery, but a huge saving.
    The very last thing that was concerning me was whether I was going to piss off an insurer.

    This topic along with the commission and ethics debates are prime reasons why we as an industry need a strong, collective governing body. A voice to be listened too and the clout to back it up.

    Reply

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