• Home insurance is becoming unaffordable for many Australian households due to increased climate threats.
• The Actuaries Institute reports that 15% of households are experiencing insurance affordability stress, a 30% increase from the previous year.
• Households facing extreme affordability stress have about A$57 billion in outstanding mortgage loans, posing a risk to the mortgage market.
• The Actuaries Institute calls for collaboration among governments, insurers, lenders, and investors to develop sustainable finance measures.

The Actuaries Institute recently published a report revealing that home insurance is becoming increasingly unaffordable for a significant number of Australian households. As of March 2024, 15% of Australian households were experiencing home insurance affordability stress. This is defined as having premiums that cost more than four weeks' of their incomes. This equates to 1.61 million households, a significant increase from the 1.24 million households found to be facing affordability stress a year prior - an increase of 30%.

The rising cost of insurance has been fuelled by increased climate threats, which have driven up premiums. This has not only contributed to inflation in Australia but has also led to some homeowners being unable to afford to protect their homes due to climate-related risks and high construction costs. Sharanjit Paddam, the report's lead author, stated, Unfortunately, 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.

The Impact on Homeowners and the Mortgage Market

The report also estimated that 5% of Australian households with home loans were experiencing extreme pressures, with their insurance premiums averaging A$5,216 ($3,505) a year, more than double the average of A$2,124. These households, facing the most extreme affordability stress, have about A$57 billion in outstanding mortgage loans as of March, representing 3% of all home loan assets. This situation could lead to a stressful financial situation if their home is damaged by a natural disaster and they either don't have insurance or are underinsured.

The report further highlighted that due to heightened risks of floods and cyclones, half of households in southwestern Queensland, the Northern Rivers region of New South Wales, and regional Western Australia faced premiums that cost more than one month's income. This situation is not only a problem for insurance but also for lenders, regulators, and governments.

A Call for Collaborative Solutions

The Actuaries Institute has encouraged collaboration among governments, insurers, lenders, and investors to develop sustainable finance measures such as resilience loans and bonds. This approach aims to support households in managing the increasing costs of insurance while also considering the broader economic and environmental context.

This situation is not unique to Australia. In the United States, for example, higher premiums are being charged in states where regulators apply less scrutiny to requests for rate increases, compared with states where officials question the justifications offered by companies and try to keep rates low. This has led to a situation where insurance is becoming unaffordable for many households, particularly those in areas prone to natural disasters such as floods and wildfires.

In conclusion, the rising cost of home insurance, driven by increased climate threats, is becoming a significant issue for many households, not only in Australia but also globally. This situation has broader implications beyond individual households, posing a risk to the mortgage market and requiring the attention of not just homeowners but also lenders, regulators, and governments. It is clear that a collaborative approach, involving governments, insurers, lenders, and investors, is needed to develop sustainable finance measures that can help households manage these increasing costs while also considering the broader economic and environmental context.