Insurance giant QBE Insurance (ASX: QBE) will cease offering builder's warranty insurance in South Australia from July 1, driven by a rising number of insolvencies.
In what is a positive sign for investors in insurance companies, (but not builders), when insurers face losses from a particular type of insurance, they can simply stop offering it. For those shareholders in QBE, Insurance Australia Group (ASX: IAG), AMP Limited (ASX: AMP) or Suncorp (ASX: SUN), worried about global warming and a perceived or real increase in extreme weather events, insurers will either raise premiums or cease offering certain types of insurance.
That's what we have seen with QBE's decision to walk away from covering builders in South Australia. Luckily for the building industry, the South Australian government has struck a deal with QBE, where the insurer will act as an agent to deliver an insurance product for the next 12 months.
According to ABC News, Australia's eastern states have acted already to cover the gap left by insurers, but Western Australia has yet to decide what it will do about building insurance.
South Australia's finance minister, Michael O'Brien said that it wasn't a profitable product for QBE, hence their decision to walk away from the market. He also said that from next week, premiums will rise by 50% to cover costs, but will still be cheaper than cover offered in other states.
David Callan from the Master Builders Association said the building industry couldn't function without insurance. Under current legislation in South Australia, building indemnity insurance is compulsory.
Foolish takeaway
We've seen several extreme weather conditions recently including floods and storms in Queensland, and northern NSW and fires and unseasonably hot weather in the southern states. Consumers can expect insurance premiums to rise in many of those states.
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The Motley Fool's purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, The Motley Fool's free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. Motley Fool writer/analyst Mike King owns shares in QBE.
