A range of market interventions may be required as climate change unravels traditional insurance models, the Australia Institute warns today.

The think tank’s new report, Premium Price: The Impact of Climate Change on Insurance Costs, considers “alarming” rises in natural disaster losses, the effects on insurance costs and what can be done about them.

“Rising insurance premiums are the here and now cost of climate change,” senior fellow at the institute Stephen Long said.

“Impacts from climate change are non-linear. They are catastrophic in nature, and traditional, linear insurance models of calculating and spreading risk are no longer fit for purpose.”

In major capital cities, insurance cost increases over the past 35 years “have massively outpaced” broader rises, the report says.

“In Brisbane, insurance costs have increased by more than five times the Consumer Price Index, and in Melbourne, the city least impacted by climate change, by nearly three times. More than one in 20 households now pay more than seven weeks’ gross income for home insurance.”

The report notes that while prices have risen sharply, general insurer profitability has declined.

“The Australian Prudential Regulation Authority’s data extends to examine the profitability of housing insurance underwriting, which has been negative since 2019-20.

“This data shows that while much of Australia’s recent inflation has been driven by corporate profits, this does not appear to be the case for home insurers.

“These insurers have been hit by a combination of higher building replacement costs, climate change-driven catastrophes, and higher reinsurance costs.”

However, insurers’ increasing ability to deploy granular, address-level pricing “raises equity considerations”.

“Households facing high or extreme insurance costs are concentrated in areas heavily exposed to the risk of extreme weather events aggravated by climate change, and people living in these areas tend to have lower gross incomes than most Australians.

“Many of the households facing affordability stress have little choice but to go underinsured or uninsured rather than pay prohibitive costs. Other households will have no choice: they will no longer be able to access insurance.

“This leaves Australian society facing a significant protection gap, the costs of which will be borne by many households least able to afford it, as well as governments and the wider Australian community.”

The report says the “most obvious policy response” is to address climate change, “both mitigating its magnitude and adapting to its impacts”.

Australia should end fossil fuel subsidies, it says, place a moratorium on new fossil fuel developments, pursue “genuine decarbonisation” and push for similar policies internationally. 

The approval of recent fossil fuel projects, including seven new coal mines since May 2022, “will make the cost of insurance even higher”, the report says. The institute also advocates for “far more investment and planning” in climate adaptation.

Inflation should be managed with “more than just the blunt instrument of rate rises, which would have no effect on insurance price increases”.

Beyond this, “specific policies to engage with the insurance market may be required”, but they need to be “carefully calibrated and regularly reviewed”.

The cyclone pool has had only “a modest effect”, because it subsidises insurance and does not directly assist homeowners.

“As climate impacts become more severe, it seems likely that the existing cyclone reinsurance scheme will not be sufficient, and a range of insurance market interventions and wider housing policy initiatives may be required.”

Click here to read the full report.

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