Natural Catastrophes expose insurance shortfalls
One in five Australian homes are either un-insured or under-insured, leaving more than 1.4 million households financially vulnerable to climate-related disasters.
The research from The Australia Institute found 4% of Australian homes have no insurance, while 15% lack adequate coverage. When it comes to contents insurance, 19% are under-insured and 10% have no cover at all.
Figures from the Australian Bureau of Statistics (ABS) indicate national property values have exceeded $11 trillion, exposing the fact that more than $2 trillion worth of property (19%) could be un- or under-insured.
A survey commissioned by Compare the Market in July 2024, found 20.1% of respondents did not have any home and contents insurance, while 33.1% reported having partial coverage. A survey published by the Insurance Council of Australia (ICA) in 2020 suggested 83% of households believed they were under-insured in the home and contents space.
Analysis of insurance assessments by MCG Quantity Surveyors in 2024 revealed Australian residential properties were under-insured by an average of 18%. Data from the ABS from two years ago showed 23% of Australians had no property insurance at all, a figure the surveyors believe may now be higher.
As a guide, if an insurance policy covers 80-90% or less of the building and contents replacement costs, the policyholder is under-insured.
Natural disaster losses are on the rise.
According to one insurer, one in six Australians faced property or vehicle damage linked to extreme weather over the 2024-25 summer season. Events included hailstorms in the ACT, storms in NSW, floods in Far North Queensland, and culminated with Tropical Cyclone Alfred.
Just two major weather events in Queensland this year – the North Queensland floods and Tropical Cyclone Alfred – have resulted in insured losses in excess of $1.2 billion, according to the ICA. More than 95,000 claims had been lodged for losses associated with TC Alfred, with the bill just shy of $1 billion. Ahead of the cyclone, concerns were raised about the number of properties that were likely to be inadequately insured.
In recent years, post-disaster insurance payouts have greatly increased. Australian general insurers paid $5.47 billion from over 300,000 claims related to bushfires, floods and hailstorms in the 2019-20 summer, according to the Climate Council. It notes that in 2022 alone, there were more than 302,000 disaster-related claims lodged, costing $7.28 billion in insured losses.
There were four declared insurance catastrophes in FY24 (a cyclone and three major storm events) which resulted in almost 157,000 claims with a value of $2.19 billion, according to data from the ICA. Personal losses accounted for 82% of all claims (almost 115,000 claims with a value of $1.79 billion). Insured losses in FY23 were also $2.19 billion, from five declared events.
The ICA notes that while Australia remains a well-insured nation, there is a substantial insurance protection gap (the extent to which potential economic losses are not covered by insurance). “These losses may be under-insured, meaning insurance does not cover the full replacement value of the loss, or there may be no insurance coverage in place.” Global reinsurer Swiss Re estimates Australia’s protection gap for natural catastrophe losses over the decade 2014-2023 at US$12 billion, or one-third of the estimated US$37 billion cost of natural catastrophes over that period.
It is often after a natural catastrophe has struck that many households find they are inadequately insured.
The Australian Housing and Urban Research Institute’s (AHURI) Enhancing housing recovery policy and practice for improving community resilience to future disasters report states a growing number of homeowners have no insurance or inadequate coverage, increasing pressure on governments and the broader community to provide financial support in the wake of disasters.
For example, around 13% the residential properties destroyed during the 2009 Black Saturday bushfires were uninsured, and 80% were underinsured, hindering the rebuilding process due to insufficient finances to rebuild. As rebuilding efforts commenced following the 2019-20 Black Summer bushfires, under-insurance complicated housing recovery as many homeowners were caught unaware, with inadequate coverage or no coverage at all.
More recently, approximately 60% of houses affected by the October 2022 floods in Rochester, Victoria, were either under-insured or not insured at all. As a result, financing housing recovery became a major challenge.
AHURI notes rates of under-insurance and non-insurance continue to grow, contributing to the stress of rebuilding post-disaster. The researchers also indicate under-insurance is likely to become increasingly problematic as floods and bushfires intensify and become more frequent in the future.
A report from the Intergovernmental Panel on Climate Change predicts global warming of 1.5℃ will lead to a four-fold increase in natural disasters. According to the Climate Council, one in 23 properties (4.4% or more than 650,000) across the country is at high climate risk and a further one in 10 (10.4% or 1.55 million) are at moderate risk.
Incorrect sums insured lead to under-insurance.
A leading cause of under-insurance is a lack of understanding of how much it would actually cost to rebuild property due to rising prices and the high costs of tradespeople given competing demands post-disaster.
Policyholders may inadvertently find themselves under-insured because they have underestimated the cost of rebuilding property or replacing lost contents. Such miscalculations then result in the policyholder nominating insufficient sums insured (the maximum the insurer will pay out in the event of an insured event causing loss).
Any shortfall between the sums insured and the actual cost of re-instatement would be the responsibility of the policyholder. In many instances, the policyholder simply cannot fund the difference, and their property does not get fully re-instated.
Inadequate insurance can have serious repercussions for property owners (including violating mortgage requirements), so it is crucial accurate sums insured are nominated when taking out or renewing home and/or contents policies, regardless of whether the property has been caught up in a natural disaster or not.
Tips to determine whether / help ensure your sums insured are adequate
For the most accurate re-building costs, engage a quantity surveyor or builder. There are also online calculators available for both building replacement costs and contents. If using one of these, be mindful that all the cost variables are accounted for (see below). It is also important to understand what is covered by building insurance (or strata insurance) and what is covered by contents so that your sums are calculated based on the correct items.
Ensure your building sums insured are:
- Based on the cost of replacing the building structure itself, its fixtures (such as light fixtures, ceiling fans and central heating/cooling systems, built-in shelving units and cabinets, bathroom fittings like taps and showers, main plugs and sockets) and other features like sheds, decking, driveways and fencing. Factor in structural improvements that have been made to the property, like sheds, decking and fencing.
- Not based on the property’s market value (what the property could sell for), rates valuation (the GRV your council uses to work out your rates) or the valuation provided by your bank (if the property is mortgaged), as these valuations are not based on replacement costs.
- Exclusive of the cost of the land, the sums should only include the property/structures built upon the land.
- Based on current building costs – prices for materials and labour have increased significantly (the ICA notes “the cost of re-building and repairing homes in the last three years has risen by 40% alone”).
- Inclusive of the cost to implement current building standards – risk mitigation requirements, such as bushfire, cyclone or flood protections, can add substantially to re-build costs.
- Inclusive of the cost of removing debris.
- Inclusive of the cost of engaging an architect and council fees.
Ensure your contents sums insured:
- Include all the contents in your home, including garages and sheds – from big ticket goods to the smallest personal items. Conduct a room-by-room inventory and list all the items in the room and their value (you should also note down any serial numbers or other pertinent information, and photographs are helpful). Understand what fittings and fixtures form part of the building structure and are therefore covered by building or strata insurance, not contents.
- Include specified item cover, or other specialist covers, if this is needed – your EBM Account Manager can discuss options with you, including any coverage requirements such as original purchase receipts or professional valuations. Specified item cover is often required for high-value goods including jewellery, art and collections. It is also important to understand any limits (and sub-limits) on cover that apply to high-value items such as jewellery and watches. Consider getting valuable items appraised professionally to make sure they’re insured for the correct amount.
- Are based on a new-for-old replacement basis.
- Are not based on the original purchase prices, but on current replacement costs.
- Are adequate to cover the number and value of assets and possessions, especially if contents have been added, replaced or upgraded with better quality and more expensive items.
- Are inclusive of any optional covers, such as portable contents cover, you may need.
Although many insurers use indexation to automatically increase the building and general contents sums insured each year (to account for inflation), all sums insured should be periodically reviewed to ensure they remain adequate. To ensure you are properly protected, your nominated sums or amounts need to take into account changes in replacement costs, new acquisitions or upgrades, and any other changes to your assets.
Your EBM Account Manager can also help you to secure other personal insurances to protect your assets and valuables, such as pleasure craft, motor vehicles, caravans, collectibles, artworks, or musical instruments.
In short, your broker can help you to secure the most appropriate covers for your unique needs. They will do the ‘shopping around’ for you and explain the differences in policies so you can make an informed decision. Your EBM Account Manager is also a valuable resource in helping to ensure you understand the policy terms and conditions, inclusions and exclusions, benefits and limitations, and your obligations under cover. Your broker will also assist with the claims process and provide guidance on renewals (including what to do if your property has been damaged by extreme weather and your policy comes up for renewal while the claim is still active).
