The Australian Prudential Regulation Authority (APRA) latest Insurance Climate Vulnerability Assessment (ICVA), has revealed that extreme climate events could affect home insurance affordability and the insurance protection gap over coming decades.
Affordable and widely held home insurance supports a resilient and productive economy by protecting households against large and unexpected financial losses, enabling them to recover quickly after shocks. The ICVA is not a forecast or prediction of future outcomes. Instead, APRA examined how home insurance coverage may fall under two severe but plausible global climate-related scenarios projected out to 2050: one with higher physical risks from weather-related events and one with greater economic impacts from transitioning to a lower emissions economy.
It found that, under both scenarios, climate-driven pressures on insurance premiums could significantly widen the nation’s insurance protection gap, thereby increasing financial risks to the system.
APRA estimates that around one in seven Australian houses are uninsured today. Under both stress scenarios this could rise to around one in four by 2050 – equivalent to an additional one million homes without adequate home insurance.
Some of the key insights of the ICVA, include:
Regional and rural communities would be disproportionately affected, with the protection gap widening more sharply in areas that already have lower levels of insurance coverage. It could grow to over 40 per cent in rural areas under both scenarios by 2050.
· Different climate risk-related factors drive the widening protection gap under each scenario, alongside economic and income growth factors:
· In the higher physical risk scenario, rising losses from more frequent and severe weather events push premiums higher. Overall expected annual losses from weather-related events could rise from around A$7bn (US$4.9bn) today to more than A$16bn by 2050.
· In the higher transition risk scenario, losses from weather events are a contributing factor but are less severe. However, significant and ongoing increases in construction costs drive premiums higher.
· A widening protection gap could increase uninsured losses for households, heighten credit risk for banks, particularly in high-risk regions, and constrain growth in the home insurance market. Over time, these pressures could erode the resilience of Australia’s financial system.
The Insurance Council of Australia (ICA) said that the findings of the ICVA underscore the need to scale resilience investment in the highest-risk locations, reform unfair taxes on insurance premiums, reform land use planning, and strengthen insurer-government partnerships.
ICA CEO, Mr Andrew Hall said that APRA’s analysis is not a forecast, but a worst-case scenario if extreme weather continues to worsen and further risk is baked into the system. “The policy choices around investment in mitigation for homes which governments make now can help to prevent rising risk. This is not a challenge unique to Australia – governments and markets around the world are grappling with the same pressures. But if we act now, we can lead the world in resilience, protecting our communities and making insurance more available and affordable around the country,” he said.