Spotlight on: Insurance affordability and availability
The cost of extreme weather is growing across the nation. People and property are being caught up in an increasing number of severe weather events including floods, storms, cyclones and bushfires
Natural disasters and insurance losses
As well as the immediate, tragic and devastating effects of natural disasters, there are flow-on effects that reverberate for years. Impacts and implications for insurance are among those flow-on effects.
Since the 2019-20 Black Summer Bushfires, insurers have paid out $16.8 billion in claims from 13 declared insurance catastrophes or significant events, according to the Insurance Council of Australia (ICA). In 2022 alone, there were more than 302,000 disaster-related claims lodged from four declared insurance events across the country, costing $7.26 billion in insured losses. Of these losses, some $6 billion stemmed from the northern New South Wales and south-east Queensland floods early in that year – the costliest insured event in Australian history and, according to global reinsurer Munich Re, the second costliest insured event in the world in 2022. ICA’s Insurance Catastrophe Resilience Report 2023-24 noted that insured losses totalled $2.19 billion in FY24 across just four significant events.
According to Swiss Re, global insured losses from natural catastrophes exceeded $100 billion for the fourth consecutive year in 2023. The reinsurance giant notes that climate change is making extreme weather events such as storms, flooding and wildfire more frequent and intense, pushing up costs for the insurance and reinsurance industry.
The frequency and severity of severe weather events is increasing. Australia’s National Insurance Brokers Association (NIBA) notes that over the past five years, insurers have incurred $20.9 billion in claims due to natural disasters. In comparison, insurers incurred less than half that ($9.9 billion) in the five-year period prior.
Research by the McKell Institute in 2022 found the direct costs from extreme weather events in Australia are estimated to grow by 5.13% each year (before inflation) and reach $35.24 billion (in 2022 dollars) by 2050.
S&P Global Market Intelligence’s Evolving Natural Catastrophe Risks report revealed that secondary perils, such as floods and fires, played a significant role in the global reinsurance industry’s inability to earn its cost of capital in five out of six years from 2017 to 2022 – leading insurers to pay higher premiums for reinsurance coverage which is then passed on to policyholders.
Insurance prices risk and, as risk from extreme weather worsens, so do pressures on insurance affordability in risk-exposed areas of Australia, notes the ICA. In 2023, more than one million Australian households experienced some form of insurance affordability stress (defined as paying more than four weeks of household gross income towards annual home insurance premiums), according to the Actuaries Institute.
Climate change is exacerbating insurance challenges
A major contributor to the increasing severity and frequency of natural disasters in Australia is climate change. This, in turn, is having an impact on the availability and affordability of insurance to protect property.
“Rising insurance premiums are the here and now cost of climate change,” said the Australia Institute.
According to the Climate Council, climate change is creating an insurability crisis in Australia due to worsening extreme weather and sky-rocketing insurance premiums.
The impact of sustained losses due to natural disasters by insurers is leading to changes in coverage (for example, some insurers will not cover property in high-risk zones) and increasing premiums.
Insurance premiums rose 16.2% in the year to the December 2023 quarter (in the previous 12 months, to December 2022, prices rose 6.3%), according to the Australian Bureau of Statistics (ABS). This marked the fastest rate of any consumer spending category and the largest increase since 2001. The ABS attributes this overall increase to higher reinsurance and natural disaster costs, which have driven up premiums for house, home contents, and motor vehicle insurance.
The Law Council notes that households and small businesses in affected regional and rural areas are plagued by chronic underinsurance and significant insurance affordability stress.
The Australian Small Business and Family Enterprise Ombudsman’s Small Business Natural Disaster Preparedness and Resilience Inquiry Report found that:
- many businesses cannot secure appropriate insurance at an affordable price, and
- some businesses are operating uninsured, or significantly underinsured, with excesses that would preclude any claim being made.
According to the ICA, “as the risk of extreme weather worsens, insurance can become increasingly costly for those in flood, bushfire-prone or cyclone-prone locations”. In some cases, insurance premiums in disaster-prone regions have increased by up to 400%.
NIBA notes that insurance products may be unavailable due to a lack of available cover within a region or class, or the insurance premiums are so high as to be unaffordable to the average policyholder, making insurance effectively unavailable. “This phenomenon is already occurring in parts of Northern Australia where on average, home insurance premiums are almost double that of the rest of Australia.”
The World Economic Forum Global Risk Report 2024 estimates that nearly 521,000 Australian homes are predicted to be uninsurable by 2030 due to the risks of extreme weather.
Modelling from Climate Valuation shows 380,000 properties in Australia – equating to about one in every 20 homes – are either uninsurable or unaffordable to insure, and within the decade this figure will rise to one in 10 properties.
Government response
Without insurance, those affected by natural disasters will find it harder, if not impossible, to recover from a catastrophic event.
Insurance Australia Group (IAG) reports that one in 25 Australians have lodged insurance claims due to extreme weather in recent years. NIBA notes that the most common reason owners chose not to rebuild after a natural disaster is due to a lack of funding, and that properties with insurance are more likely to be rebuilt than those without cover.
Recognising the growing problem, the Australian Government established the Hazards Insurance Partnership in the October 22-23 budget, and the Insurance Affordability and Natural Hazards Risk Reduction Taskforce in May 2024 to develop strategies for mitigating disaster impacts and address affordability issues across the insurance sector.
Further to this, on 16 May 2024, the Select Committee on the Impact of Climate Risk on Insurance Premiums and Availability was established by the Senate. The committee was charged with investigating and reporting on the unaffordability and unavailability of insurance in some regions due to climate-driven disasters, and how this can be addressed. The report was released on 26 November 2024.
“The report highlights how more frequent and intense extreme weather events, driven by climate change, along with the expansion of development into high-risk areas, is widening the insurance protection gap in high-risk parts of the country,” notes the ICA.
Informed by six public hearings and 56 submissions from agencies, industry and the public, the report investigates the combined pressures of climate change and rising insurance premiums.
“It is clear from this inquiry that insurance has become the latest major stressor for communities as they face the brunt of climate-driven disasters,” said committee chair Senator Mehreen Faruqi.
The report makes eight recommendations designed to help drive down premiums, improve community resilience, improve insurance industry transparency, boost disaster preparedness, and better protect Australians in the face of worsening extreme weather. It is centred around governments, communities and insurers working together to improve resilience to extreme weather risk.
Recommendations
The eight recommendations are designed to deliver:
- greater transparency and oversight (recommendations 1-3)
- measures to target insurance affordability (recommendations 4-5)
- mitigation and resilience to reduce the impact of climate disasters (recommendations 6-7), and
- the ‘polluter pays’ model (recommendation 8).
In summary:
- Recommendation 1: Establish and maintain a publicly accessible national disaster risk map in collaboration with all levels of government and the insurance industry.
- Recommendation 2: Require insurers to provide policyholders with detailed explanations of premium costs, including how disaster resilience efforts affect pricing.
“For most people in disaster-impacted communities and beyond, insurance is opaque, complicated and difficult to understand,” Senator Faruqi said. “At the same time, rises in premiums are not explained to the consumer, making it impossible to understand the rationale for jumps in price or what measures to take to counter the rising cost.”
- Recommendation 3: Require the Australian Competition and Consumer Commission (ACCC) to monitor and publish premium prices across Australia.
Climate risk study to shape future of insurance affordability: The nation’s biggest insurers (IAG, Suncorp, Allianz, QBE and Hollard) are modelling premium affordability under different climate scenarios for the Australian Prudential Regulation Authority (APRA). The Climate Vulnerability Assessment will help improve understanding of how affordability may evolve between now and 2050 amid changing natural disaster threats and energy transition risks such as changes to climate and energy policies, technological innovation, social adaptation and market shifts.
- Recommendation 4: Phase out general insurance taxes through intergovernmental cooperation.
Actuaries Institute research has found the second biggest component of the cost of insurance premiums, after peril risk, is taxation. State taxes and charges, such as stamp duty and levies to fund emergency services, can drive up premiums by 20 to 40% (stamp duty on insurance increases premiums by nine to 11%).
- Recommendation 5: Expand the Cyclone Reinsurance Pool to include all natural disasters.
Data from the Australian Reinsurance Pool Corporation shows the cyclone reinsurance pool is delivering average premium savings of 38% on both SME buildings and contents and home insurance in the highest-risk areas. The pool is also easing availability pressures, with quote success rates in the highest-risk areas increasing from 66% to 84%.
- Recommendation 6: Increase federal investment in resilience measures.
The ICA notes that a five-year $2 billion resilience program would be expected to save governments and households over $19 billion by 2050, achieving nearly a 10-fold national return on investment.
- Recommendation 7: Review land-use and planning policies to reduce future exposure to high-risk areas.
According to the ICA, post-disaster building-related costs are estimated to be around $2 billion per year for cyclones, $1.475 billion per year for floods, and $486 million per year for bushfires.
- Recommendation 8: Introduce a levy on coal and gas extraction companies to fund disaster mitigation and offset rising insurance premiums.
Insurance companies suffered US$10.6 billion of climate-attributed losses in 2024, just shy of the US$11.3 billion of direct premiums they underwrote for commercial fossil-fuel clients in 2023, according to Insure Our Future. Of the 28 insurers reviewed, more than half were hit by climate-attributed losses that exceeded the coal, oil and gas premiums they earned.
Impact on business and insurance
The committee’s findings are likely to significantly influence future government policies and the insurance industry. Key industry representatives (including the ICA, NIBA and Australian Consumers Insurance Lobby) welcomed the findings and support a number of the recommendations.
The implementation of the recommendations is aimed at reducing premiums and ensuring cover is available for property in disaster-prone areas. It remains to be seen which recommendations will be adopted and successfully actioned, and how these influence cover going forward.
In the interim, owners with property in higher-risk areas should look at implementing risk mitigation measures (such as flood, cyclone, or bushfire-proofing) to help offset rising premium prices. Work with your EBM Account Manager to present a compelling risk profile to prospective insurers when looking for cover or renewing policies.