Half the population of southwest Queensland, NSW’s Northern Rivers, regional WA and the NT face home insurance premiums that exceed a month’s income.

That is the finding of a report today from the Actuaries Institute and Finity.

Lead author Sharanjit Paddam says as premiums outpace wage growth, home insurance affordability has worsened. 

About 1.6 million Australians now pay more than a month’s income for a year’s home insurance, up 30% from 1.24 million a year ago.  

As a result, the proportion of “affordability stressed” households rose to 15% in the year to March. It was 10% in 2022.

The trend is concerning, says Mr Paddam, an award-winning actuary with three decades’ climate risk experience.

“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.”

Affordability pressures have worsened following a 9% rise in median insurance premiums in the year to March. Properties facing the highest 5% of premiums, largely due to their flood risk, had premium rises above 30%. Southeast Queensland has the largest number of households with extreme affordability pressure, reflecting high population growth in recent decades.

Home insurance premium increases are primarily a consequence of higher reinsurance costs, driven by rising perils costs. The Actuaries Institute says this is “consistent with our expectations that climate change will increase pressures on home insurance affordability”.  

The institute adds: “We continue to expect that home insurance premiums will rise unless significant and prompt action is taken to reduce greenhouse gas emissions, improve the resilience of existing homes, and improve buildings standards and land use and planning.”

Actuaries say the issue presents a systemic threat to the economy.  

Households facing insurance premiums that are more than four weeks’ gross income are defined as facing affordability stress. For the median household, premiums represent only 1.4 weeks of gross income, and the institute says for most Australians home cover is affordable.

But worsening insurance affordability pressures “may lead to systemic impact on both the home loan market and SME commercial lending market”, the report says.  

Regulators need to closely monitor this by collecting and assessing data and understanding how the risk will increase with climate change, while the prudential regulator “may need to consider monitoring how lenders are meeting the insurance requirements for acceptability of collateral under APS 220”.

The Actuaries Institute is encouraging governments, insurers, lenders and investors to collaborate on sustainable finance measures such as resilience loans and bonds.

The institute’s CEO Elayne Grace says 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,” she says.

To gauge the financial pressure households face, the actuaries assessed the impact of insurance affordability pressure on home loan serviceability. It found under- or non-insurance may affect future home loan security, credit quality and credit availability.

Among Australian households with home loans, 5% are experiencing extreme home insurance affordability pressure. They represent $57 billion in outstanding loan balances.  

For an estimated 180,000 mortgaged households facing home insurance affordability stress, the average premium is $5216 a year. Australia’s average premium is $2124.

“This is potentially a problem that’s bigger than just insurance,” the report says. “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 institute says resilience loans can “provide a potential pathway to long-term security for [stressed] households, as well as for lenders, insurers, investors and government”.

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