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Opportunity knocks for insurance companies

There’s no denying insurers have had a terrible few years. Bushfires, floods and cyclones have all combined to eat away at profit margins.

Insurers such as Suncorp (ASX: SUN) and QBE Insurance (ASX: QBE) have clawed back costs with vastly increased premiums. This has been felt particularly keenly in the North Queensland region, which has seen across-the-board increases of up to 800% in insurance premiums. Even properties that are 8 km (as the crow flies) from the nearest beach or river have seen insurance hikes of 50% or more because properties are apparently being priced by postcode, not individual flood or cyclone risk. For strata unit blocks, the increases are even higher.

Many insurers now do not offer flood cover, charge exorbitant amounts for such cover, or include very specific clauses that cover ‘flood damage’, but only if that flood damage was not caused by a tidal surge or cyclonic weather event. As might be expected, consumers are unimpressed and because of the cost, many residents remain uninsured.

Queensland Premier Campbell Newman is leading a delegation to Federal Parliament to cause (among other things) a change in the way insurers’ price properties. It is suggested that properties should be individually inspected to ascertain risk and then priced accordingly. Insurers and the Insurance Council of Australia have countered by saying that North Queensland and strata properties in particular have historically been underpriced, and now the market is correcting.

Foolish takeaway

But what does all this mean for insurance shares?  Whenever there is upset or prospect of regulatory change, there is opportunity. The recent bad weather was caused by the ‘worst La Niña conditions on record’ and isn’t likely to be repeated for a number of years at least. North Queenslanders are feeling neglected by the very companies that promise to make everything OK when the unexpected strikes. The company that takes the extra step to reach out to consumers, to make them feel important and to make them feel like their business is wanted, will be in a position to dominate the local market. All it takes is an (admittedly, clever) advertising campaign.

Perhaps more importantly, the company that can pull off such a coup will have shown itself to be in touch with the human psyche and with the mindset of consumers. In a business such as banking and insurance where the average Joe forms a large part of the market, the company that understands how Joe thinks and what he wants will gain itself the competitive edge.  To paraphrase a quote from famous salesman Jordan Belfort, people don’t buy anything, it gets sold to them.

Furthermore, with the prospect of Federal government input into this long-running saga, the company that moves first may just find itself to be ahead of the regulatory curve. One only hopes that it is an ASX listed company that executes this strategy, so shareholders can enjoy the fruits too. Keep an eye out for insurance companies trying to grow their market share, and for more information on the conventional ways insurers are recovering their costs, check out this article by Regan Pearson.

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Motley Fool contributor Sean O’Neill doesn’t own shares in any company listed in this article. 

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