IN SHORT

• Insurance has become less affordable owing to inflation, supply chain disruptions and other external factors, combined with a series of extreme weather events.
• The people who live in flood- and bushfire-prone areas are often also the households least able to afford pricey insurance.
• In the short to medium term, subsidised mitigation work and access to basic cover can contribute to longer-term insurance affordability; in the long term, better settlement planning and building standards are essential.

For one or two weeks when bushfires rage or storms roll in — followed by stormwater and flooding — every news headline is dominated by the devastation. For the communities involved, however, the trauma and recovery long outlast the news cycle.  

Those people lucky enough to have insurance lodge their claims, get quotes and join the months-long wait list for tradespeople, hoping to have a habitable home, replacement belongings and functional workplaces once again.

Formany, the annual insurance renewal after an event is the sting in the tail. 

“Price increases from insurers during 2022 have been averaging 10–15 per cent, including covering for the inflationary effects on the labour and material costs. However, there are pockets in the market that have experienced higher pricing changes,” says Kaise Stephan, partner, Actuarial & Insurance Solutions, Deloitte Consulting. “Further price increases are expected in 2023 in anticipation of ongoing but moderating inflation and higher natural catastrophe and reinsurance costs.”

Faced with significant premium increases, some customers opt to pay higher excesses; others choose to leave off flood cover and ‘self-insure’; others abandon their insurance altogether. 

According to the independent lobby group Climate Council, by 2030 up to 500,000 Australian homes may be uninsurable because of climate change and extreme weather events.

This is because either insurance premiums will be too expensive for homeowners, or they will be refused insurance cover entirely. Meanwhile, New Zealand’s first national adaptation plan says homes worth a total of NZ$100 billion are at risk of flood, potentially impacting 675,000 New Zealanders.

Piling on costs

Part of the increase in insurance premiums comes down to external factors impacting the entire global economy, which also explains why properties outside of high-risk zones are seeing higher premiums. 

Deloitte’s Stephan says these factors include: increases in costs for material, parts and labour; supply chain issues (“which most insurers are still dealing with”); three La Niña weather patterns in the past three years; heavy flooding along the east coast of Australia; an elevated frequency of smaller weather events; a war in Europe; rising reinsurance rates; labour shortages and wage inflation; and the adoption of the new insurance accounting standard IFRS 17. 

“All of these factors are aligning and driving increases in insurance costs and claims and hence in insurance premiums, particularly for short-tail lines such as home and motor,” he says.

“Irrespective of flood risk, the increasing value of a property will also affect a customer’s annual premium,” adds an Insurance Council of Australia (ICA) spokesperson. “For example, a home built 10 years ago for A$300,000 cannot be built for the same amount today.”

These factors also drive up the cost of claims for insurers.

An additional factor is the hardening reinsurance market. S&P Global says climate risk is one of the region’s top three threats. 

After a spate of costly natural disasters in 2022 and early 2023, reinsurers are charging more. Insurers are forced to make greater allowances for future natural disaster events, while increasing their own risk-retention levels. 

Right now: build resilience

Insurance affordability is clearly a complex problem. Scott Hawkins, managing director at Munich Re Australia, sees the solution involving a combination of short-, medium- and long-term interventions. 

Given that we are working with existing building stock, the first approach should be to make those buildings and communities more resilient, he says. To achieve that, some temporary government subsidies may be required to help those property owners who are least able to afford mitigation measures.  

Munich Re is part of the Australian Business Roundtable for Disaster Resilience and Safer Communities. The roundtable found that every dollar spent on mitigation can save at least two dollars in recovery costs.

“What’s also important is that we keep adequate risk signals, so we know what the expected cost is from claims on properties,” says Hawkins.

The ICA says it welcomed the establishment of the Disaster Ready Fund (DRF), which began providing up to A$200 million annually to be invested in disaster mitigation for five years, from July 2023. However, the ICA is calling for this funding to be extended to a 10-year, indexed rolling program.  

“An ongoing DRF would ensure that Australians receive the benefits of resilience and mitigation investment for years to come, and allow governments and communities to plan for long-term projects that put downward pressure on insurance premiums,” says the spokesperson.  

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