How natural disasters hurt us all financially - what to do before one hits

When natural disasters occur, insurance premiums, policies and the property market can all be affected - causing financial stress to homeowners in different ways.

Home and contents insurance helps you cover the costs of restoring your property and valuables if they are damaged or stolen. As with any insurance policy, you’ll pay a premium to maintain your coverage and access financial support if disaster strikes. However, natural disasters can play a big part in just how much you pay.

Insurers are constantly looking at data to measure the amount of risk involved in insuring properties. If natural disasters are regularly reoccurring in your area, it’s likely that your insurer will increase these premiums to account for this higher level of risk.

This is because when the chance of a natural disaster is higher, the likelihood of losses is also higher; if the insurer doesn’t collect enough money to cover the associated risk, then there won’t be enough to cover your losses. To protect themselves, and ensure there’s enough money to go around, they’ll typically dish out higher premiums.

Unfortunately, as a homeowner, this means forking out extra funds, which can eat into your budget.

To put this premium increase into perspective, according to the Actuaries Institute, home insurance premiums rose 28%, to $1,894, in the year to 31 March 2023, with the highest risk properties, such as those in flood-prone areas, up by a much larger 50%.

While some insurers pull up premiums in areas prone to severe weather events, some pull back their offerings - leaving very limited coverage options for you to choose from.

If they do have something up for grabs, you may need to pay extra for it by way of an additional premium - increasing your overall insurance cost.

Ultimately, this means fewer options and forking out more for those options.

Since no one can predict just how much damage a natural disaster will bring, there’s also the risk of underinsurance if the severity or implications are greater than anticipated.

When it comes to home insurance, you can get either complete replacement cover or sum-insured cover. Complete replacement cover includes costs to rebuild your home to the pre-disaster standard, whereas sum-insured cover protects you up to an agreed amount.

If your restoration costs come in higher than your insurance cap, this means the amount you’ll be reimbursed after a successful claim may not actually cover the full cost of repairing the damage - leaving you out of pocket. It’s important to understand what your claim limits are so you know how much you’ll be covered for. 

You can also avoid being underinsured with sum-insured cover by checking if your insurer offers a safety net; this is when they add up to 20% to your sum-insured amount in the event of a total loss, to give you some wiggle room.

If you live in a disaster-prone area, it’s worth considering complete replacement cover; while it’s generally more expensive and not as easy to come by, it means you’re less likely to be underinsured and under financial pressure to get things back to normal.

When properties become too expensive to insure due to their high likelihood of being hit by harsh weather events, such as flood, they may become uninsurable.

This can happen in two ways:

1. if a homeowner can’t afford or justify the cost of insurance, and;
2. if an insurer refuses to provide cover altogether.

The same way taking out home and flood insurance is not compulsory for owners, insurers are also under no obligation to provide cover for floods in home insurance policies.

Climate valuation considers properties to be effectively uninsurable when the annual cost of extreme weather-related damage reaches 1% of the replacement cost of the property.

Unfortunately, uninsurable homes aren’t uncommon. Climate Council’s research estimates that one in every 25 properties in Australia (equivalent to 520,940) will be effectively uninsurable by 2030.

Uninsurance can be an issue as it presents a substantial financial risk to homeowners if a natural disaster occurs.

While most home and contents insurance come with storm and fire cover (albeit with certain exclusions), flood cover may be excluded, making it something you’ll need to explicitly opt-in to.

Don’t just assume that flood cover is included in your policy. Do your research on all relevant Product Disclosure Statements (PDSs) to make sure you’ve covered so you’re not left out of pocket down the track.

Even if you have coverage for certain natural disasters, you may not be covered for specific circumstances surrounding them.

It’s important to be aware of these exclusions because if you’re not covered for a particular event, you’ll have to fork out additional funds to fix the damage that’s been done.

Here are some of the possible exclusions for common weather events:

Storms

• Storm damage occurring within 48-72 hours of buying a policy.
• Damage that occurs after the stormwater reaches the ground (usually covered under ‘runoff’ if the policy includes it)
• Damage or loss to pools, free-standing walls, gardens and lawns, and exterior paint.

Floods

• Actions of the sea, such as storm surges, high tides, and king tides.
• Flood water combined with run-off or rainwater.
• Flood not caused by rainfall, for example a landslide caused by a storm.
• Flood as a result of a blocked or broken stormwater drain, water pipe or gutter.
• Damage to gates, fences, retaining walls and driveways.
• Rainwater entering your home due to a structural defect, faulty design, or poor maintenance.
• Wind, rainwater, hail, or snow entering your home through an open window or door.

Fires

• A bushfire that occurs less than 72 hours after you bought your policy.
• Intentional fires.
• Accidental fires caused by negligence or recklessness.
• If your house doesn't comply with fire regulations, for example a heater isn't installed properly.

If you’re not exactly sure what you’re covered for, speak to your insurer or read your policy’s PDS to find out.

It’s also important to note that exclusions can vary from provider to provider.

If you experience significant damage to your home as a result of a natural disaster, you may consider relocating or rebuilding. This could be funded through recuperated losses from insurance claims, your own savings, or a bit of both.

Either way, moving or starting from scratch can cost a lot of money, especially in times of skilled labour and materials shortages where costs are at an all-time high.

Choosing to stay or go is a personal decision you should seriously consider. It’s worth doing some research to help you decide what path might be right for you.

Severe weather events can drastically reduce the market value of affected properties, as buyers may be reluctant to invest in a destination where the risk of a natural disaster is high.

Living in an area that’s deemed less desirable to buyers can make it difficult to not just make a profit on your property, but to sell it full stop. This is made even harder if it’s uninsurable - purchasers may be deterred by the inability to insure the property. Having a house you want to sell, but can’t, can inevitably cause ongoing financial stress.

Falling property values could also potentially torpedo the equity in your home, leaving you stuck in a mortgage prison and unable to refinance your home loan. You could also potentially find yourself unable to refinance your home loan if you can’t get home insurance due to rising premiums, as some mortgage lenders require homeowners to have home insurance as part of their home loan eligibility criteria.

It's devastating when a natural disaster damages or destroys your home. Finding out you don't have enough insurance, and having to come up with extra cash, only adds to this distress.

Ensuring you have adequate insurance coverage is extremely important for peace of mind and navigating a natural disaster as comfortably as possible.

Some of the best things you can do to get natural disaster ready, financially, include:

• Find out if you live in a disaster-prone area. You can do this by contacting your insurance company, local council, or an emergency services organisation in your state or territory.
• Check your insurance and do it now. Find out how much you're covered for and the conditions of that coverage. That way, you won’t be met with any unpleasant surprises down the track when you go to claim your insurance.
• Check if you have enough insurance to repair, rebuild or relocate if your property is in the line of fire.

While natural disasters aren’t something we can control, we can control how we prepare for them. Being across your home insurance policies and knowing where you’ll stand financially if disaster strikes is one way to safeguard yourself if and when they hit.