Millions of Australians Face Home Insurance Affordability Crisis

Damaged buildings are seen after a cyclone in Kalbarri, Australia, on April 12, 2021. Yvonne McKenzie/Getty Images

An insurance affordability crisis is brewing in Australia as extreme weather and high inflation have caused premiums to soar in the past year, affecting millions of households.

The median home insurance premiums jumped by 28 percent to $1,894 (US$1,225) in the 12 months to March, according to a new analysis (pdf) from the Actuaries Institute.

The increases were even more excessive for households living in areas with the highest risk of disaster, as they reported a more than 50 percent surge in insurance premiums.

“This is the largest increase in home insurance premiums I have seen over the last two decades,” said Sharanjit Paddam, an actuary at Finity Consulting and the report’s co-author.

At the same time, the percentage of Australian households suffering insurance affordability stress climbed to 12 percent from 10 percent during the period.

Insurance affordability stress refers to the situation in which households have to spend more than one month’s worth of their gross annual income on home insurance.

The report estimated that 1.24 million Australian households had difficulty paying insurance premiums, with many of them having to spend an average of 8.8 weeks of their total income.

Residents in the flood-prone Northern Rivers region of New South Wales, as well as north Queensland and Western Australia, which have high cyclone risks, were among those most impacted by insurance cost increases.

The Reasons for the Rise

The report attributed the price upticks to significant increases in the cost of rebuilding a home as a result of supply-chain shortages, disaster-related surges in demand, and high inflation.

Input prices to the house construction index shot up to 157.4 in the June 2023 quarter from 118.8 in the March 2020 quarter—before the start of the COVID-19 pandemic, data from the Australian Bureau of Statistics show.

In the 12 months leading to the June quarter, input prices for house construction rose by 7.4 percent.

Other main price drivers include increases in natural peril premiums because of the huge financial losses caused by recent adverse weather events and reinsurance premium hikes that insurance companies passed on to consumers.

A house is inundated by water during flooding in Melbourne, Australia, on Oct. 14, 2022. William West/AFP via Getty Images

According to the Insurance Council of Australia, a peak industry body, 11 insurance catastrophes have been declared since 2019, resulting in $13 billion worth of claims paid by insurance companies.

Mr. Paddam warned that the surge in premiums could cause insurance to fall out of the reach of many households, thereby bringing about significant consequences for society.

“Without insurance, households will struggle to recover from disasters and governments, taxpayers, charities, and many informal means of support will be left to assist,” he said.

“This usually results in households receiving some support but will not allow them the full economic recovery they would receive if insured.”

Government Has $10 Billion Reinsurance Pool

To lower insurance costs, the Australian government introduced a Cyclone Reinsurance Pool in July 2022 to help insurers cover cyclones and related flood damage with a $10 billion guarantee.

The government expected the pool to bring down total cyclone premiums in the country by $368 million (26 percent) and total flood premiums by $228 million (9 percent). However, the report pointed out that the pool had little or no effect on the premiums of 87 percent of Australian households and that some might even have their insurance costs go up.

That was because the pool wasn’t specifically designed to reduce affordability pressures at a household level.

“The Cyclone Pool was designed to reduce premiums for the highest-risk households,” the report reads. “It did not explicitly consider home insurance affordability, as it did not consider the economic resources available for households.”

Actuaries Institute’s analysis follows recent research released by the consumer group CHOICE that found that many Australian consumers weren’t adequately insured despite paying for their home policies.

“Two in five respondents to our national survey of home and contents insurance policyholders reported that they had been impacted by extreme weather events in the past five years, but our research found that the insurance market is failing to cover these events fairly and affordably,” CHOICE CEO Alan Kirkland said.

“Many people are being forced to pay higher premiums, reduce their cover, or abandon insurance entirely.”

CHOICE identified five major problems that consumers were having with their insurers and put forward a number of recommendations to help tackle those issues.