Analysis

Inflation on services like insurance is sticky and a global problem — so I took matters into my own hands

Bill shock — it's a well-known phenomenon in this cost-of-living crisis.

My turn came this week, via a car insurance bill.

The "total amount payable" rose 19.5 per cent to $1,042.85.

Incredulous, I called the insurance company.

After navigating a menu voiced by a computer for 5 minutes, I began speaking with a customer service officer located in the Philippines.

My question was simple: why had the cost of my car insurance spiked 19.5 per cent when nothing at my end had changed?

The company representative then explained to me why car insurance premiums, in general, rise.

But I wanted to know why my insurance policy had increased so significantly in price.

The employee eventually told me the price I was charged was automated or generated by a computer.

This, it seems, is standard practice.

What goes into the number

AMP's deputy chief economist, Diana Mousina, has been researching insurance premium pricing.

"Their computer-generated number reflects [a number of customer risks] that they've put into their own models," she said.

"Ultimately the insurers or the actuaries that are figuring out the premiums just put in place all the factors that go into premium pricing and all those risks."

A spokesperson from the Insurance Council of Australia told the ABC:

"When an insurer calculates a premium, it is likely to take a range of factors into account. These factors will change from person to person and from insurer to insurer."

Some of the factors, they said, are the type of cover, optional benefits, previous claims and incident history, whether the premium is paid annually, monthly or in instalments, government taxes and any state or territory duties or levies, the level of cover, the insurer's risk assessment and the level of excess.

To be fair, life has ups and downs, so it stands to reason that these factors have led to higher insurance premiums.

Indeed, AMP research shows insurance sector prices are up 16.4 per cent on average in the year to March, due to climate change and supply chain constraints — think about the difficulties for smash repairers sourcing parts for a car.

So a 19.5 per cent increase, while steep, is not extraordinary.

But, there's a problem

Nothing had changed at my end.

And that's precisely what I told the insurance company.

Once it was established nothing had changed in terms of my "risk", she told me she would "run some more numbers through the computer".

After a brief pause, she offered to lower the increase in my premium to 13 per cent — down from 19.5 per cent.

I accepted.

While satisfied I had saved some money by making a 15-minute phone call, it was unsettling to know the bill could be tweaked within minutes and seemingly without any approval process.

Was I overcharged to begin with?

Judo Bank senior economic adviser Warren Hogan thinks I might have been.

"Well they've set a price in the market … that's their prerogative," he said.

"The fact that they can bring it down — if that's widespread, to some extent you could argue that's price gouging."

Therein lies a fundamental economic problem of our time, with ripple effects across society.

Services inflation a 'bit of a mystery'

Services inflation, more broadly, is proving sticky.

We're talking about the costs of rent, education, health care and energy, as well as banking and financial services (including car insurance).

It's also a global phenomenon.

"For example, in Canada, core and headline inflation are below 3 per cent but services [inflation] is still above 4 per cent," Hogan said.

UK headline inflation has fallen to 2 per cent but services inflation specifically is still running close to 5 per cent.

It's why central banks have been so reluctant to cut interest rates.

The Bank of England, for example, this week decided against cutting interest rates despite headline inflation falling to the globally accepted target band of between 2 and 3 per cent.

Economists think elevated services inflation is largely related to higher labour costs, including wages and increased superannuation contributions.

But, Hogan concedes, higher services inflation is also a "little bit of a mystery".

Could consumers bring down inflation?

Price-gouging aside, could computers and artificial intelligence be responsible for spitting out generic, elevated price increases for consumers?

It's an entirely reasonable approach to company pricing — no-one would expect a firm to individually go through tens of thousands of bills to check their accuracy.

What if, say, 15 million Australians called their insurance providers and demanded a significant discount? Could that materially lower inflation to within the Reserve Bank's target band of between 2 and 3 per cent?

"Potentially," AMP's Diana Mousina said.

"I don't know if everyone would have the same experience.

"If they did, then I suppose they could."

Warren Hogan's confident it would materially bring down headline inflation.

"That's how markets work, right?

"The inflation's what's hurting you financially, the fact that you're spending more money on everything and you've got to now start looking for cutbacks.

"And so you're asking the question when someone puts the price up.

"That's the market working."

Reserve Bank governor Michele Bullock opened her Tuesday press conference by saying: "I think the truth is that we're at a really complex part of the cycle at the moment."

That's true for the RBA — inflationary pressures are proving stubborn, but the bank also does not want to push a fragile economy over the edge by hiking interest rates.

Are consumers themselves in a better position to battle on the front lines of inflation?