Majors flag ‘emerging challenge’ facing mortgaged property

While borrowers are required to take out building insurance when they settle their mortgage, two CEOs of the major banks have outlined that more needs to be done to ensure that appropriate insurance cover is maintained on mortgaged property to protect borrowers and the financial system.

Speaking to the House of Representatives standing committee on economics for its review of Australia’s four major banks on Wednesday (12 July), members of the major banks were asked about the significant increase in the costs of home and contents insurance and whether they had any oversight to the maintenance of these policies.

The committee outlined that while it was a requirement to have building insurance to cover the mortgaged asset at the point of settlement, the rising cost of insurance may be resulting in borrowers letting these policies lapse due to affordability constraints, which could be a risk to the borrower and financial system.

Moreover, given the growing frequency of natural disasters in the past few years, some mortgagors may find it hard to find an insurer that will cover their property if it is in a higher-risk area.

While mortgage agreements run up to around 25 years but building insurance contracts are generally taken out annually, the bankers were asked what oversight they had to ensure that appropriate levels of insurance were being taken out to protect properties in which they held an interest.

On Wednesday (12 July), the CEO of ANZ said that he did not believe there was “a problem to solve” regarding underinsurance, flagging that the properties mortgaged by ANZ that had been burned down or flooded were insured.

However, senior representatives from both NAB and CBA said it was an issue that was worth exploring.

The bankers highlighted that the bank had been looking into this matter recently given that households are getting more stretched.

Cost-of-living crisis and climate change both place pressure on ability to meet premiums.

Rachel Slade, NAB’s group executive for personal banking, told the committee that she believed it was “an emerging challenge”.

While she noted that, like ANZ, NAB had not found instances of customer harm or situations where either the customer or the bank had had a significant loss because of a certain circumstance impacting their insurance, she added that she believed it should be a growing focus for banks.

According to Ms Slade, NAB recently sampled some customers in flood-prone areas to “check in on them” and found that there was a level of underinsurance and that there was also “a mixed level of understanding from customers about their what their obligations were to maintain that insurance”.

Ms Slade said that while the bank is now working to improve the way that it communicates to borrowers about insurance requirements, she believed that “there are some opportunities” for the banking industry to “improve this”.

“Because we really feel like – whether it’s climate change, cost of living, or cost of insurance – that this is a potential emerging issue for our customers and for our bank,” Ms Slade said.

NAB group chief risk officer, Shaun Dooley, agreed that this was “an emerging challenge” as the cost of insurance increasing will have implications for affordability.

“And so we need to continue to work with customers and insurance partners on how we’re going to deal with this issue both in the short term but also from a strategic perspective,” he said, flagging that NAB has some plans in development at the moment.

In conclusion, NAB’s CEO Ross McEwan said: “We need to consider what fraction do we put into the system? And then, what do you do after that, as well? Do you take the mortgage away from people?

“All those sorts of issues I think we have to really work our way through…

“I think it is a good topic for the industry to work its way through as well … because – you’re quite right – when things get tight: what gives?”

On Thursday (13 July), it was the turn of the Commonwealth Bank of Australia (CBA) and Westpac Banking Corporation (Westpac) to front the committee, with CBA CEO Matt Comyn (dialling in remotely while suffering from COVID-19) agreeing that the insurance of mortgaged properties was an issue worth raising.

Mr Comyn said: “I think it’s a very important topic that you’re touching on both in the context of the current situation but certainly as we look forward…”

The CBA CEO said that the bank had been able to administer a solution where it is able to understand a customer’s level of insurance subsequent to origination with “mixed success” and had not seen high levels of underinsurance.

However, he added: “I think you’re quite right; there’s been quite a dramatic shift in premiums, even over the course of the last 12 months but certainly over the last few years. And as we look further – as you would otherwise anticipate an increase in flood and fire risk – those premiums are likely to, understandably, increase. There will presumably continue to be areas which will be very difficult to insure. We’ve still got housing supply where people are resident in areas that are a high fire risk.”

David Cohen, deputy CEO of CBA, added that the bank had been prompting borrowers living in areas at higher risk of natural disasters to ensure they have insurance in place and an appropriate level of insurance.

He explained: “In the current environment, where building costs have risen sharply, last year’s insured amount may not be appropriate this year. So the point of that has been to prompt our customers to ensure that, given as they live in those zones, that they are turning their mind not only to the existence of insurance but the amount they are insured as well.”

Similarly, Westpac CEO Peter King said: “[T]he losses from underinsurance are not large; so it hasn’t been an issue for us, historically. But if we look forward, I think what we are seeing in insurance prices are big increases.”

Mr King reflected that insurance providers have raised premiums as a result of “the impact of a more volatile climate” and the rising cost of reinsurance in the global market.

He told the committee that ANZ would typically check for insurance when originating a loan and as the average loan term is around five years, this would typically be done once in five years.

“But we might need to increase that,” he said, noting the issue.

“I think we’ll have to see if that becomes a big risk,” adding: “It’s not at the moment, but we’re moving faster in that area.”

Suggested solutions for better insurance oversight

As none of the major banks write general insurance themselves, tracking insurance levels may prove challenging, not least as it may pose privacy issues.

However, CBA’s Mr Comyn suggested that a potential solution to provide better oversight of insurance on mortgage properties could be a new centralised reporting resource.

He explained: “Perhaps one solution would be similar to the way we have a comprehensive credit reporting bureau, where financial institutions participate and send information into it and then you can check the circumstances of that customer. Perhaps something similar to that could be developed for the insurance industry, where we could, at any point in time, call and see what level of insurance is being held? I think that transparency would be helpful.”

However, the CBA CEO also questioned what action banks would have to take if they did find widespread underinsurance of properties.

Mr Comyn told the committee: “Like I said, I don’t believe it’s an issue at the moment, but if you take a multi-year or multi-decade view, there could potentially be an issue. And then while contractually, yes, we may be able to recall our loan, realistically, that would be a very difficult thing to do. And who would then take on that financing? And what position would that leave their customer or borrower or resident in?”

As such, he said another solution could be broader product innovation, citing that earthquake-prone New Zealand has introduced life of loan or pooled insurance for homes.

The CBA head continued: “Unfortunately, there probably is a role for the government. And again, I think it is an important area and it’s a good topic for the committee (at least in my view), to be very focused on because it’s the sort of issue that requires co-ordination and a whole-system approach across federal, state, financial institutions, the insurance industry … While I don’t have a great deal of concern about it immediately, I certainly have quite a significant amount of concern about it over the long term.”

What do you think about the insurance issue on mortgaged properties? Have you experienced any challenges or losses as a result of not being able to secure adequate building insurance? Let us know in the comments below.

[Related: Mortgage arrears lift amid tightening serviceability]