In California and Florida, getting home insurance is becoming an almost impossible task.

It’s either unaffordable or in some cases not being offered at all, with insurance companies pulling out in droves.

The combination of climate-fuelled natural disasters, coupled with increasing populations often living in risky areas, is threatening the global insurance industry.

This isn’t theoretical for Australians; bushfire and flood disasters during the past few years have seen insurance premiums skyrocket.

It doesn’t just affect those in disaster-prone areas; ultimately, everyone ends up footing the bill.

Skyrocketing insurance premiums were also one of the biggest contributors to inflation over the past 12 months, rising 16.4 percent according to the latest ABS figures.

“We’ve seen in other markets around the world like California and Florida that have almost very similar profiles to Australia in terms of peril risks like flood and bushfires, as well as cyclones, a growing population has been left vulnerable and exposed,” CEO of the Insurance Council of Australia Andrew Hall says.

“In fact, in California, some of the major insurers are no longer offering new insurance policies for home and contents.

But there’s not much time to fix it, according to Mr Hall.

“We actually don’t have that long.”

“If we talk to people in the international reinsurance markets, they tell us that Australia’s window for action is closing fast.”

Professor Paula Jarzabkowski, an expert on the insurance protection gap, from the University of Queensland, agrees.

“We are in a really serious place. It’s a tipping place, but we’re still in a good position,” she says.

But if we don’t address the insurance problem, Professor Jarzabkowski fears the impacts will be long-lasting and affect not just those in disaster areas, but a growing number of people who are simply priced out.

“We are creating an underclass of people who are not served by institutions that we think work.

“That is my biggest fear because it has such a powerful societal effect and it’s a long-term effect.”

What’s driving rising premiums?

The most obvious driver of premiums is the increasing severity and frequency of major disasters fuelled by climate change, with floods and storms the most costly for insurers.

Increasing building and repair costs due to inflation are adding to the bill.

And importantly, the cost of reinsurance is also increasing — that’s insurance for insurance companies.

“For many years, Australia was considered an offset for the disasters that insurers experience in the northern hemisphere,” Mr Hall explains.

“But over the last seven years, that’s changed completely because every summer we’ve had big events.”

“We’ve seen global reinsurance premiums increase between 20 and 30 per cent, which follows a number of years of losses by reinsurers in markets like Australia and that’s having a flow-through effect.”

2023 — a year ravaged by extreme weather

Unprecedented floods across the Gulf of Carpentaria caused major damage to properties in Queensland in March 2023.

Residents were rescued in Lake Conjola, NSW, from major flooding in November 2023.

Drone footage shows the scale of flooding in Cairns in December 2023.

A bushfire near Perth razed buildings in November 2023.

A bushfire near Tara in Queensland destroyed more than 20 structures in October 2023.

Mr Hall says that in Australia households are working hard to keep paying their insurance, but increasingly people are underinsured.

“We are concerned that there is a growing protection gap and that’s driven by the higher cost of premiums driven by the underlying risk.”

A report from the Actuaries Institute last year estimated, one-in-eight households in Australia were facing home insurance affordability stress, following a 28 per cent increase in home insurance premiums.

And a survey by consumer advocacy group Choice found 87 per cent of households said their premiums went up last year.

What not to do?

Looking at the United States can provide some valuable insights on what not to do, according to both Mr Hall and Professor Jarzabkowski.

“In the United States, for example, 10s of billions of dollars now go into subsidising their flood schemes and that’s just resulted basically in developers putting more homes in flood zones,” Mr Hall says.

“Ultimately, in Australia, anything we do, where we’re trying to pool the risk, pool the cost of the risk, any surplus funds, anything generated out of that … needs to be reinvested in reducing the risk.”

Professor Jarzabkowski agrees that simply subsidising insurance is pointless in isolation.

“What’s not good is subsidising insurance without changing the underlying risk,” she says.

“I really want to emphasise that in some places, they’ve only fixed the insurance, which has allowed the risk to get worse and that is one of the criticisms of the National Flood Insurance programme in the USA.”

But there is a big benefit to having people insured.

“There’s a lot of data that shows well-insured people with quickly settled claims get back to being able to earn, and they have lower social, emotional and health effects after a disaster,” Professor Jarzabkowski says.

“It would have been better if it [the US] had subsidised the insurance but use that to build back better, which didn’t happen.

“They’re trying to work out how to do that now.”

In comparison, the UK government has started a flood reinsurance scheme, which also gives grants to households who have made a claim, to build back better after floods.

How to make houses more resilient?

A similar scheme was introduced after the 2022 Queensland floods, with grants offered by the state government to raise houses and make them more resilient.

But it didn’t necessarily translate to lower insurance premiums.

“Flood is one of our biggest risks in Australia that is very hard to mitigate against,” Mr Hall says.

“When it comes to bushfire and cyclone, you can strengthen homes, you can clear land around homes and villages, you’re able to do things to make homes more durable to those events.”

“We think that governments should be really focused on reducing the flood risk in Australia, particularly to the current housing stock that we’ve built.

“And of course, moving forward, making sure the same mistakes are not repeated.”

While there are often strict building codes for fire zones, flood zones don’t usually come with equivalent restrictions.

The Insurance Council of Australia (ICA) wants federal and state governments to develop better standards across the board.

“Alongside the development of a new national standard, the Insurance Council is urging governments to adopt a risk-based approach that stops development in high-risk areas, requires stronger building codes and standards and/or adequate resilience infrastructure in areas of higher risk, and prioritises low-risk areas for development,” the ICA pre-budget submission says.

“Future costs to home owners, businesses and governments can be avoided with better government planning and investment.”

What about buybacks?

The Insurance Council of Australia also wants the federal government to introduce a voluntary buyback and house-raising scheme in the upcoming budget.

“We estimate that there are around about 200,000 homes in Australia that sit in what’s known as a 1-in-20 flood zone, which means they probably facing very high insurance premiums,” Mr Hall says.

“We think those homes should be the target of a long-term buyback program because it’s obviously not going to flood each and every year.

“That enables them time to be able to open up new land releases for people to move to safer higher ground and then the government scheme kicks in to purchase the previously flood risk home and demolish it and create maybe parkland or sporting fields and the like.”

While buybacks can be a good idea, Professor Jarzabkowski says it will only work if people have somewhere to go.

“Otherwise, you’ll see buybacks this year and those people buying into places that are equally flood-prone,” she says.

Likewise, Professor Jarzabkowski says raising houses can also be a good idea for suitable properties but needs to be considered alongside updated flood mapping projections, taking into consideration the impacts of climate change.

Can better data make a difference?

Another key recommendation from the Insurance Council of Australia (ICA) is for the federal government to invest in data, to understand climate risk and how we prepare for it.

“The development of a robust, national hazard database that streamlines existing national, state and territory datasets, that is accessible to all levels of government, industry and the Australian public can play a critical role in improving and standardising our understanding of climate risk and how we prepare for it,” the ICA’s pre-budget submission states.

In particular, understanding the changes to flood risks based on increasing global temperatures, driven largely by the burning of fossil fuels, will be critical.

Some of that work is already underway with the federal government in the process of updating the Australian Rainfall and Runoff guidance, which estimates the size and impact of floods based on different climate projections.

“Some of the flood studies that we rely on when we’re mapping the flood risk in Australia are as old as 30 or 40 years,” Mr Hall says.

“In many instances, local governments do need the help to be able to do an update flood studies, particularly in areas where we’ve noticed that the rainfall is now higher and that water behaves differently because there’s been a lot of development.”

“If we can get on top of our challenge of understanding flood data in this country a lot better and provide it to the market in a more open fashion, people will be better informed.”

What’s at risk?

Keeping the insurance industry afloat may not seem like the biggest problem facing society but Professor Jarzabkowski says it’s an institution that plays a key role in ensuring people can live a good life.

“We have been the lucky country for a very long time and that’s meant that even within a degree of inequality, most people could have a good life here.

“But what you see is people who are long-term uninsured, lack access to other financial systems, people who have houses that aren’t safe and can’t get back into them for more than two years afterwards, they suffer really serious financial effects that flow through to the next generation.”

She’s hopeful that government and private sector reforms can be made in time.

“We have a chance to both do the things and check how they perform so that we can ratchet up the quality of what we’re doing as we invest this money,” she says.

“I know there’s a serious look at disaster risk mitigation. I don’t know if there’s enough money in it, but I hope there will be.”

Andrew Hall says while there’s been a real mindset shift in government in the past couple of years, the level of investment in resilience and mitigation needs to increase.

“When we do things like build flood levees around towns, we know for a fact the premiums come down in those towns.

“If more of that work can be done, it will have a positive impact on premiums.