Floods drive sky-high home insurance premiums and pending uninsured disaster

A new Actuaries Institute report reveals just how catastrophic natural disasters have been to the cost of living. Home insurance premiums in Australia surged 46% in the last year, primarily due to frequent, dangerous, and costly floods and cyclones. 

The 2022 East Coast floods alone resulted in $6.0 billion in home insurance claims and contributed to a significant spike in sum insured and natural peril costs for policies, according to the report.

As a result, low-income households in the worst affected areas have copped the brunt of the price hikes, paying over 50% more in home insurance premiums than non-stressed households in all states except the ACT – mostly due to flood risks. 

The report claims cyclones haven’t seemed to target poorer households the way floods have, in large part because of the successful Cyclone Reinsurance Pool in Northern Australia. Without a government-backed scheme protecting insurance providers from the financial risk of floods, the risks and costs get passed along to homeowners. 

Unfortunately, this now means the most affordability-stressed Aussies are the ones who need home insurance the most. 

“While no information is available on whether these stressed households purchase adequate home insurance, this population is at risk of being either uninsured or under-insured,” writes the report.

“The estimated home insurance premium for the 12% of Australian households which face extreme affordability stress is $3.6 billion, representing a potentially significant protection gap for the market.”

The protection gap worries homeowners, too. Last year, Mozo’s insurance report found that 46% of surveyed households claimed they were underinsured due to rising home insurance premiums, with over a third (36%) having to claim due to flood damage. 

A fifth (20%) of homeowners claimed if their premiums jumped again, they would reduce their coverage, while a tenth (9%) said they would cancel their policy altogether. 

“Times are tough, it's getting harder and harder to find good value insurance, let alone at a good price,” says Mozo expert spokesperson Rachel Wastell.

“But with rising insurance premiums eating away at household budgets, there’s never been a better time to compare providers and see if you can get a better deal.”

According to the Actuaries Institute, the average yearly cost of home insurance in Australia is $2,234 in 2023. This is up 46% from last year when it was just $1,534. The main factors increasing the cost of home insurance were:

• Rises in the overall sum insured.
• Elevated natural perils risks, especially floods.
• Market inflation, extreme demand, and supply-chain cost pressure on home insurance providers. 

These rises weren’t felt equally across the nation, however. Home insurance premiums rose by different amounts depending on state or territory. NSW ($2,600), Queensland ($3,032), and the Northern Territory ($3,145) have the highest average yearly home insurance premiums, primarily due to flood and cyclone-prone areas. 

Many of the worst-affected regions with a high risk of flooding, bushfires, or cyclones will be effectively uninsurable by 2030 due to climate change.

Costliest natural disasters for home insurance

On average, the report found that cyclones, storms, and floods comprise the bulk of disaster risk-related costs ($513) factored into yearly home insurance premiums across Australia. 

Bushfires and earthquakes ($77) make up the smallest amounts, while other insurance cost components, such as policyholder-specific risks, provider costs, and government charges, pad out the rest ($1,643). 

In fact, bushfires and earthquakes make up so little of the affordability risk to homeowners the numbers are nearly negligible. Storms add premium pressure to only 0.3% of affordability-stressed households, while cyclones (7%) and floods (14%) dominate the majority of home insurance bills where a single natural peril controls over 50% of the policyholder’s premium. 

Home and contents insurance premiums vary widely by price because no two policies (and policyholders) are the same. Not only do different policies offer different levels of coverage, but risk factors such as climate, local hazards, and building conditions can affect how home insurance providers price their premiums. 

Cheap home insurance has become a priority for many Australians ducking price hikes if they don’t want to ditch their policy outright, but a cheap policy may not offer consumers the financial protection needed – especially for Australians living in flood-prone areas. 

But since these Australians need protection the most, what options do they have to afford home insurance?

Some of the best ways to keep home insurance premiums down are to:

• Opt for a higher excess.
• Compare policies by getting quotes. 
• Improve flood resilience in housing design as recommended by the SES. 

All of these reduce some of the financial risk to the insurance provider – and, therefore, some of the premium.

There will also need to be larger-scale improvements to the insurance industry to tackle rising costs. The report points to the massively successful Cyclone Reinsurance Pool (sometimes just called the “Cyclone Pool”) as an example of a structural solution with promising results for households affected by cyclonic flooding. 

The report claims the reinsurance scheme could cut $370 million from cyclone insurance premiums Australia-wide, a price drop of 26%, once all insurance companies required to opt in do so. The Cyclone Pool also has the potential to eliminate $230 million (9%) from cyclone-related flood risk. 

The main drawbacks are that the scheme only covers cyclonic floods, not heavy rainfall or storms, and that it isn’t means-tested, so it doesn’t target low-income households specifically. This would make it inadequate for the problems facing the small amount of affordability-stressed households living in high-flood risk areas. 

“Flood risk is highly localised and disproportionately affects a relatively small number of households which are the most affordability-stressed, while cyclone risk is more geographically widespread,” explains the report.

Therefore, any solution aimed at reducing the costs of storm flooding should be surgical and precise, and accompanied by a widespread reduction in risk, says the report.

“In order to tackle [affordability pressure] holistically, short- and medium-term measures are necessary,” it advises.

This includes government cost-sharing arrangements to help shoulder the price burden for those who need it most – “lowering insurance premiums faster than otherwise possible”. 

Long-term, however, Australia will need to rethink its relationship with floods.

“Central to any optimal mix of solutions [...] is that strong risk mitigation activities must be part of the program to extract long-term benefits for all Australians and Australian society.”

Compare home and contents insurance policies in the table below.