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Insurance companies under fire

With some homeowners facing a 700% increase in insurance to cover their homes in flood prone regions, insurance companies are coming under fire.

Harriet Galagher, a resident in Roma whose house was inundated by flood waters during the March 2010 floods, is reported to have been stunned when she was told one of Suncorp Limited’s (ASX: SUN) subsidiaries had increased her premium on the family home was rising from $80 a month to $670 a month.

And that’s despite making modifications to flood proof Ms Galagher’s home including raising the home, rewiring and replumbing. There are reports that other residents in Roma face insurance bills of up to $11,000 despite their homes being built on a hill, being unaffected by the floods and having no previous claims. Earlier this year, Allianz estimated it could cost $24,000 to insure a home and contents to the value of $389,000 in a high-risk zone in NSW.

Major insurance brands including Suncorp, NRMA – owned by Insurance Australia Group (ASX: IAG) and RACQ automatically provide flood cover and customers can’t dump it, forcing up premiums in some flood-prone regions.

Insurers on the other hand say they need more information about flood zones and building information from governments for them to calculate a more accurate risk rating, and ascribe a premium. They also want bans on new house in flood and bushfire zones to avoid rocketing premiums, and tougher laws on ‘brittle buildings’ that get wrecked in wild weather.

The Queensland government is pushing for all insurers to offer discounted insurance to homeowners who take steps to mitigate their property’s flood risk. Under the proposed scheme, lifting the fuse box, raising the house or replacing carpet with tiles on the ground floor would count towards a lower premium.

Raising premiums certainly hasn’t hurt the performance of insurer’s shares. Over the past year Suncorp shares have risen more than 43%, while Insurance Australia Group has seen gains of over 64%, compared to the S&P / ASX 200 Index’s (Index; ^AXJO) (ASX: XJO) 15.2% rise. QBE Insurance (ASX: QBE) has under-performed, dropping by 3.7%.

Foolish takeaway

Governments and insurers need to work together to make insurance a more level playing ground. The worst case scenario could see insurance companies refuse to offer flood insurance at all.

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