More households than ever are under-insured. Here’s what needs to be done

As heavy rainfall and rising floodwaters caused by ex-Tropical Cyclone Alfred drench northern New South Wales and southern Queensland, it will take weeks for the full extent of the damage to be assessed. Major flood warnings have been issued for several rivers.

What we do know, however, is that more Australians are going without insurance than ever before, and this includes in the affected regions. Without full coverage, much of the damage will never be repaired.

Pervasive under-insurance in cyclone-hit areas

Although data on under-insurance is sparse, it is by now clear sharply rising costs of home and contents insurance is driving ever more households to abandon coverage over their most important asset.

The federal parliamentary inquiry into insurers’ responses to the 2022 NSW floods pointed to a growing trend of households dropping flood coverage. In particular, insurer Allianz reported 90% of its customers in high-risk areas such as northern NSW did not have flood insurance.

These figures are alarming – but unsurprising given the sharp rise in the cost of home insurance over the past five years. Higher costs on insurance premiums are driven by the rising costs of insurance payouts to households, as more frequent and more damaging weather-related events drive higher claims.

Insurance Council of Australia figures show the average cost of building insurance claims rose more than seven-fold (in inflation-adjusted terms) between 2004 and 2022. This incredible increase in insurer payouts to households has forced insurers to raise premiums.

As a result, the average premium quadrupled between 2004 and mid-2022, with much steeper rises in risky, flood-prone locations.

This data on insurance premium costs doesn’t factor in insurers’ costs for disasters in 2022 and 2023, which came to more than A$10 billion – more than insurers’ costs for all the disasters between 2015 and 2020 combined. Adding the cost of damage caused by ex-Cyclone Alfred to the bill reminds us that growing climate risk means growing costs of disasters. These are costs that households simply cannot afford.

Business-as-usual isn’t working

The parliamentary inquiry into insurers’ responses to the 2022 floods shed light on the systemic failures of the insurance system under heightened climate risk.

Households waited up to two years to have their claims paid after long disputes with insurers. Too many households that thought they were covered ended up without enough funds to rebuild. This is not a reliable risk-management system to carry Australian households through the rest of the 21st century.

Nor does the insurance system accommodate the upgrading of homes so they are more resilient to growing climate risk.

It’s essential to implement the inquiry’s recommendations that seek to force insurer rebuilds to “build back better”. This would reduce the damage more frequent climate disasters will reap on our built environment. Only by reducing the cost of that damage can insurance affordability be addressed.

Although the inquiry offered important insights, little systematic documentation of the experiences of uninsured households is available.

Low-income and disadvantaged households are over-represented in locations where climate risks are the highest and insurance premiums are the least affordable. These households often cannot afford to rebuild without the insurance coverage they cannot afford.

What about the Cyclone Reinsurance Pool?

The emergence of the insurance crisis Australian households are now experiencing was entirely predictable. But it wasn’t until 2022 that policymakers finally moved on the issue by establishing a cyclone reinsurance pool in an effort to bring premiums down.

The pool essentially provides a non-profit alternative to commercial reinsurance. This is the insurance that insurers themselves use to cover the risk of high household claims.

The government’s reinsurance pool still charges insurers a premium to access reinsurance, but it’s cheaper than commercial reinsurance. That’s because it is non-profit and, as a government agency, it has cheaper costs of capital. The cheaper reinsurance costs for insurers can then be passed on to households as cheaper premiums.

These savings, however, cannot possibly tackle the insurance crisis facing households as climate risks rise. The 10% average reduction in premiums attributed to the pool fades in comparison to premium cost increases of – on average - 300%.

But there are many other ways the pool could have an impact. It could add requirements on insurers as a condition for accessing cheaper reinsurance.

For instance, it could force changes in how insurers deal with climate mitigation and adaptation measures.

Using the pool to deliver these kinds of changes would require modifications to the legislation that governs the pool.

It would also require a government brave enough to stand up to the insurance industry, which seeks as little regulation over its activities as possible. It remains to be seen whether the losses as a result of ex-Cyclone Alfred can persuade policymakers to stand up for Australian households and drive meaningful insurance reform.