Big data could see bushfire and flood-prone homes priced out of insurance

At its extreme, the use of big data could create a vicious cycle where the insurance pool becomes smaller, less diversified, and higher risk, leading to increasingly higher premiums for remaining customers.

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People steer their boat by the old Windsor Bridge under rising floodwaters along the Hawkesbury River in the Windsor suburb of Sydney on 9 March 2022.

Saeed Khan/AFP via Getty Images

The use of big data by insurers in Australia could lead to homeowners living in at-risk areas being priced out of the insurance market, the Actuaries Institute has warned.

The warning comes as parts of New South Wales and Queensland continue to face heavy floods, which has led to 21 deaths and billions of dollars in property damage so far.

Actuaries Institute CEO Elayne Grace said the benefits of leveraging data from smart devices, aerial imagery, and raw text input has allowed the insurance industry to uncover a greater dispersion of risk, resulting in a more accurate estimate of risk. While this creates benefits for insurers and low-risk customers, it also leads to a greater range of premiums that result in insurance for homeowners living in areas prone to floods and bushfires becoming more expensive.

"Some consumers are excluded from insurance: There will be a growing number of customers for whom insurance becomes less affordable and, as a consequence, they under-insure or do not insure at all. If the risk exceeds the risk appetite for all insurers, insurance will become unavailable," Grace said at a digital economy conference conducted by the Reserve Bank of Australia and the Australian Bureau of Statistics.

The Actuaries Institute also warned that the growing use of big data for insurance could potentially lead to an extreme set of outcomes, termed as a "vicious cycle", where the insurance pool becomes smaller, less diversified, and higher risk, leading to increasingly higher premiums for remaining customers.    

It said the Australian government may have a role to play when competitive insurance markets do not deliver adequate cover at an affordable price, specifically in cases where the underlying risk is beyond the consumer's reasonable control and the insurance is essential. In flagging this concern, it has recommended that the government establish an expert group to discuss and develop a set of broad principles to protect consumers.

On Wednesday, Productivity Commissioner Catherine de Fontenay said at the same conference that the measurable benefit behind adopting cloud in Australia is still unclear, except in circumstances where a company is operating in regional and remote Australia.

The pattern was found as part of a study conducted by the Productivity Commission into whether cloud technology is associated with higher firm turnover per worker and higher wages per worker.

Beyond this pattern, however, de Fontenay said there is currently no correlation between a company performing well and using cloud services when viewing companies' turnover per employee and average wages data.

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