Extreme weather insurance costs set to triple by 2050: are you prepared?

Australians tolerate a harsh climate, constantly subjected to mother nature’s wild temperament, in order to live in the most beautiful country on earth. But the literal price we pay for this splendour is rising at an alarming rate.  

Australians are a hard-nosed bunch. However, the Insurance Council of Australia (ICA) Insurance Catastrophe Resilience Report 2021-22 suggests that this tenacity will be tested in the years to come.

The cost of climate change

The report commissioned Australian think-tank the McKell Institute to calculate the cost of this year’s floods across the entire economy.

McKell calculated that theaverage Australian household paid $1,532 in direct costs in 2021-22 as a result of extreme weather events, such as flooding, bushfires and drought.

The report revealed that this cost will balloon to $2,509 a year by 2050, almost triple the current 10-year rolling average of $888 per household, when the direct economic cost of extreme weather events is calculated to reach $35.24 billion per annum.

Australian households paid an average $525 in 2021-22 to cover price impacts on agricultural goods, as well as additional government expenditure on recovery efforts funded through taxation.

Where Australians are being hit hardest

These costs aren’t dispersed evenly across the nation. The Australian Competition & Consumer Commission (ACCC) released the Northern Australia Insurance Inquiry in 2020. The report found Australia’s north has been hardest hit by rising insurance premiums, with home and contents insurance about 1.8 times more costly than in the south.

Economic factors such as inflation, the cost of living, and rising interest rates could see Australians at higher risk of “mortgage prison”, where they’re unable to refinance their home loans. Now the Reserve Bank of Australia (RBA) is highlighting the risk that climate change poses to your personal finances, as well as the economy as a whole.

Since the Black Summer bushfires of 2019, the Insurance Council has declared 11 catastrophes and two Significant Events, culminating in more than $13 billion in claims.

This is an ongoing predicament. The ICA surmises that Australia will experience more severe bushfires, hotter and longer heatwaves, rising sea levels that are exacerbating hazards along our coastlines, cyclones that are projected to intensify and possibly track further south, and an increase in rainfall intensity and associated flooding.

A recent whitepaper revealed the areas of Australia where coastal property is at the greatest risk of being affected by climate change, which may affect property values as well as the cost of home loans and home insurance premiums.

Why it pays to choose home insurance carefully

The home insurance policy you select may cover a range of adverse events, but do you know exactly what is and what isn’t included?  

Some of the common natural disasters a home insurance provider may cover include:

• Fire - including bushfires, is typically covered. However, if the property is in a bushfire-prone area, or climate change increases the rate of bushfire in your area, the insurer may choose to not offer coverage, or charge a significant premium for it.
• Hail - Damage from hail is typically covered under storm damage.
• Lightning - Typically falling under storm damage, this includes damage caused by lightning, as well as fires and power surges.
• Cyclones - May be covered in home insurance policies. However, some insurers may not offer coverage for some properties in the Northern Territory, northern parts of Queensland and Western Australia.
• Floods - Flooding may be covered by your home insurance provider. However, there are exception suburbs, as the rate of flooding increases across Australia due to climate change.
• Earthquakes - Damage by earthquakes is covered across most insurance policies.

If more and more extreme weather events are expected to occur across Australia, the list of what your insurance policy may cover could shrink - or the premium you may pay for the privilege could soar. 

In light of this turbulent outlook and the anticipated rising costs of insurance, it may be worthwhile weighing up your options and considering what impacts extreme weather events may have on your property in the coming years.

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