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Suncorp says higher house premiums needed

The cost of living in Australia is pretty high but Suncorp (ASX: SUN) Chief Executive Patrick Snowball has said insurance premiums need to rise.

Yesterday, after announcing a 32% drop in profit for the Suncorp group Mr Snowball has signalled “high single-digit” increases in home insurance in coming years. However, despite dropping the group’s overall profit, the general insurance division, which includes names like GIO and AAMI, surged profits 79% higher.

Mr Snowball highlighted the cost of reinsurance as a serious problem and said Australia’s big houses are in high risk areas. “Australia has the biggest houses in the world, and they are located in some of the highest-risk areas of the world”, Mr Snowball said.

He also identified the issue of underinsurance as being a factor in promoting higher premiums. “Increasingly, we are seeing a high level of under-insurance both on the premises themselves and more importantly the contents, and this is something we need to reflect in the premiums we charge”.

Suncorp and rival Insurance Australia Group (ASX: IAG) (which operates under names like SGIO, SGIC, CGU, Swann and NRMA) control much of the domestic general insurance market and will welcome higher premiums. Today IAG reported a profit of $776 million, up from $207 million a year earlier and said the outlook remained positive.

Foolish takeaway

Investors will welcome higher premiums, particularly as the companies embark on cost cutting initiatives. The increased prices are a reflection of many towns becoming more and more expensive to insure but a rise in the number of homeowners underinsuring or lapsing premiums could drag on profits. Both IAG and Suncorp are worthy of a spot on watchlists.

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Motley Fool contributor Owen Raszkiewicz does not have a financial interest in any of the mentioned companies.

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