Steeper home insurance premiums have caused the number of Australian households experiencing home insurance affordability stress to rise by 30% to 1.6m in the past year, a new report published by the Actuaries Institute shows.
The Home Insurance Affordability and Home Loans at Risk Report found these households spend an average of 9.6 weeks of their gross income on home insurance, which is seven times more than the average household.
Overall, the proportion of “affordability stressed” households – those facing home insurance premiums that are more than one month’s gross annual income – rose to 15% in the year to March 2024 from 12% the previous year.
The report, commissioned by the Actuaries Institute and authored by Finity actuaries, said affordability pressures had worsened following a 9% rise in median insurance premiums. The 5% of properties paying the highest premiums, typically due to floods and cyclones, endured the steepest rise in premiums, up by more than 30%.
The report’s lead author Mr Sharanjit Paddam said, “While insurance remains generally affordable for 85% of households, it’s concerning that there’s now 1.6m households struggling to afford to insure their homes, up from 1.24m a year ago.
“This is because increases in premiums are outpacing wage growth. Unfortunately, we expect this will continue because of the overall increasing risk of natural disasters associated with climate change, which will continue to put upward pressure on premiums.”
Southeast Queensland has the largest number of households with extreme affordability pressure, reflecting high population growth in recent decades. However, southwest Queensland and NSW’s Northern Rivers, regional Western Australia and the Northern Territory have the largest proportion of households with extreme affordability pressure.
Half the population in these areas faces home insurance premiums that exceed a month’s income due to their high flood and cyclone risk.
Given the rise in affordability-stressed households, the report’s authors analysed the potential flow-on effects to Australia’s A$2.3tn ($1.56tn) home loan market. An estimated 5% of Australian households with a mortgage face home insurance affordability stress. For these households, their average home insurance premium is A$5,216 a year – more than double the A$2,124 average premium.
Mr Paddam said: “These 180,000 households with home insurance affordability stress represent about A$5bn worth of home loans. If their home is damaged by a natural disaster and they either don’t have insurance or are underinsured they could find themselves in a stressful financial situation. So, this is potentially a problem that’s bigger than just insurance. It’s also a problem for lenders, regulators and governments. The risks for them are only going to rise as we face more climate-related natural disasters and increasing issues with insurance affordability.”
The Actuaries Institute is encouraging governments, insurers, lenders, and investors to collaborate on sustainable finance measures such as resilience loans and bonds.
Actuaries Institute CEO Elayne Grace said, “We know as a country we need to manage the risk of the changing climate. Sustainable finance should be part of the solution. It creates a path forward for households, investors, insurers and lenders, and allows government to focus on households in most need and community-level measures.”