Why Your Cost Of Living Is About To Rise

A correction to our Money Weekend article.

The government’s Financial Claims Scheme covers bank deposits up to $1 million.

According to our pals at the Australian Prudential Regulation Authority (APRA):

“The Commonwealth Government has issued a guarantee of deposits at ADIs up to $1 million per depositor in any one ADI.  The guarantee will remain until 12 October 2011…

“After 12 October 2011, the current Government guarantee on deposits will be removed.  However, the FCS will continue to apply to deposits under the scheme for amounts up to a new limit to be determined by the Government.”

The APRA document is undated.  Our guess is the new guarantee will be much lower than $1 million.  More likely it will be something around $250,000.  It’s only a guess.  So don’t quote us on it.

Today’s Australian Financial Review (AFR) announces:

“Insurance shake-up looms”

The article explains:

“The move comes amid growing concern over insurance companies refusing to compensate policyholders for recent flood damage as thousands of Brisbane residents turned out over the weekend to clean up the inundated city.

“Premier Anna Bligh said there were thousands of people who believed that they had flood cover but who were discovering they were covered for the ‘wrong’ type of flood.  ‘It is very hard to believe we can’t get a better system,’ she said.”

“A better system” means enforced insurance for all.  And probably enforced flood insurance too.

It means government knows best – again.  It means government and bureaucrats trampling over the market and deciding the market has gotten it wrong.

What will this mean for you?  It means higher insurance premiums.

Home insurance is set to follow health insurance.  The Australian government meddled there too.  The result is a huge increase in costs and premiums.

With non-compulsory insurance, companies have to make sure they don’t price themselves out of the market.  But when a product or service is compulsory there’s no fear of that.  They can charge as much as they like.

There’s no incentive to keep prices low.

Let me show you what I mean…

We always enjoy the Health Payments Index that appears in the papers.  The latest tells you the Federal Government had approved an average premium increase of 5.78%.  Whereas health insurers claim benefit payments had increased by 9.1%.

You can see how payments have increased in the chart below:

Source: Australian Health Insurance Association

As you’d expect, the Australian Health Insurance Association (AHIA) wants bigger health insurance rises.

Since compulsory health insurance came in, payments to healthcare providers have increased by 201.9%.  From $3 billion to over $9 billion.

Don’t forget, insurance companies aren’t charities.  If benefits increase then so do premiums… there’s no free lunch.

As you can see on the chart above, until 2000, the rise in payments was flat.  But since Lifetime Health Cover made health insurance compulsory for many, benefit payments have soared.

And the idea that private health cover would help the public sector and reduce costs didn’t happen either.  In 1998 the Federal Government spent about $25 billion on health.

In 2010 the Federal Government spent over $50 billion.

Whenever governments get involved, suppliers know they have a sure buyer.  For the technology companies, doctors and other suppliers it’s a certain income stream… a gravy train… a licence to print money.

Of course, Lifetime Health Cover did lead to an increase in people insured.  You can see that on the chart below:

Source: Australian Health Insurance Association

But despite the triple-digit increase in benefit payments, the number insured has increased by just… 59.4%.

In 1998 the average payment per insured person was $409.95.  By last September it was $776.31 per insured person.  An increase of 89% per person.

And just like in the public sector, healthcare providers know that people are insured.  So there’s no need to keep prices low.  The healthcare providers charge as much as they want because they know they’ll get paid.

The fact is, private health insurance is just another tax.  Any payment forced on a private individual is a tax.  It doesn’t matter whether payment are made to government or a business.

Think of it this way.  If it was compulsory for all Australians to buy a small-cap investment newsletter do you think I’d only charge $99 you for the first year?  Of course not, I’d set the price many times higher than that… simply because it would be compulsory for you to buy it… so what you gonna do about it!

Unfortunately for me (and in my opinion, unfortunately for you… [wink]), small-cap newsletters aren’t a compulsory purchase for you!

But that’s not all.  Today’s AFR headlines page 38 with:

“Reinsurance giant to lift premiums”

Oh what a surprise.  Actually, it’s not a surprise to you.  Because we told you that would happen in the January 8 issue of Money Weekend, “Why Australians Will Pay for Queensland’s Floods”.

In that article we countered the argument of the ‘free-lunchers.’  Those that claimed foreigners would pay for the floods because insurance companies reinsured offshore.

Today’s AFR article confirms what we told you:

“The world’s largest reinsurer has said it will push through price increases on the reinsurance policies sought by local insurance companies in response to the severe flooding in Queensland and more frequent natural catastrophes in Australia.”

The article continues.  It quotes Munich Re general manager, Stefan Golling:

“Considering the accumulation of natural catastrophe events in Australia, I expect reinsurance prices to go up and the retentions that insurers keep on such events will increase as well.”

Funny that.  A week ago we wrote:

“If a reinsurance company has to fork out more money than expected to pay for a major incident then it will naturally demand an increased return or premium before it invests more money.

“That means the Australian insurance firm paying a higher rate on the bonds it issues or on the reinsurance or on the reinsurance policies.  And that means passing on higher premiums to policyholders.”

In contrast, the mainstream was all excited about the boost the floods would give the Australian economy.  The Age quoted KPMG chief executive Michael Andrew:

“This [the Queensland floods] will release a lot of cash from insurance company balance sheets, many of which aren’t in Australia.  Many are reinsured offshore in Europe or the US, so the extent to which they have to fund loss-of-profit claims, a lot of money potentially flows into Australia.”

… And a lot of money flows out of Australia thanks to higher reinsurance costs.

Just when government and central bank policies are increasing consumer costs, it seems governments will add an extra cost by fiddling with the insurance industry.

You can see what happened to private health insurance premiums and payments when compulsion was introduced.  Expect the same to happen to housing insurance if state and federal governments stick their big noses in.

Look out, more cost of living increases are on the way.

Regards,

Kris Sayce
For Money Morning Australia

Tagged as: afr, APRA, government, health, healthcare, insurance, public