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On a warming continent defined by fire, flood and drought, the price of protection is rising fastest where Australians can least afford it.1
As climate change drives more intense bushfires, heavier downpours and higher seas, the country’s once-stable insurance safety net is beginning to fray.1
From northern Queensland cyclone zones to floodplains in New South Wales, households, farmers and small businesses are confronting premiums that outstrip their incomes, or policies that exclude the very perils they fear most.3
Regulators warn that without rapid changes in planning laws, building standards and climate policy, growing pockets of “insurance stress” could harden into de facto redlining, where banks and insurers quietly retreat from high-risk postcodes.5
At stake is not only who pays when disasters strike, but whether vulnerable communities can remain on the land, rebuild after shocks and plan for the next generation.8
Australian climate science agencies report that extreme heat, dangerous fire weather and intense rainfall events have all increased in recent decades, stacking the odds towards more frequent catastrophes.1
At the same time, consumer watchdogs find premiums in northern Australia are now more than double those paid elsewhere for similar home cover, largely because of cyclone and flood exposure.3
Community surveys show rising numbers of Australians cancelling or downgrading cover due to cost, creating a growing protection gap that shifts risk back onto families and governments.9
This is the new politics of insurance in a heating climate, where data models, reinsurance markets and planning schemes quietly decide which towns can thrive, and which may be left to manage retreat on their own.5
How regulators, insurers and governments respond in the next decade will help determine whether Australia can keep insurance affordable and available, or whether climate change turns protection itself into a luxury good.8
Climate risk and shifting hazard maps
The Bureau of Meteorology and CSIRO report that Australia has warmed by around 1.5 degrees since 1910, with more frequent extreme heat, longer fire seasons and more intense downpours.1
The latest State of the Climate assessment notes a continued increase in dangerous fire weather days, a shift towards drier conditions in the south, and heavier short-duration rainfall that drives flash flooding.20
Emergency management agencies warn that climate change is lengthening and intensifying the bushfire season, particularly in southern and eastern Australia, while also amplifying extreme rainfall and coastal storm surge risk.17
For insurers, these trends translate into more frequent and severe losses from bushfires, riverine and flash floods, coastal inundation, cyclones, hail and heat-related damage such as infrastructure buckling or crop failure.16
Home policies are most exposed to flood, bushfire, storm and coastal risks, business policies add supply chain disruption and business interruption, and farm insurance layers in drought, heat stress, pests and market volatility as climate pressures compound.19
How insurers are repricing climate risk
Australian insurers are quietly redrawing their risk maps, using more granular, property-level modelling to price in climate-driven hazards for homes, businesses and farms.13
The Australian Competition and Consumer Commission has found that home, contents and strata premiums in northern Australia are considerably higher than elsewhere, with average combined building and contents premiums around $2,370 in 2021–22 compared with much lower averages in the rest of the country.3
The ACCC concluded that higher and more volatile claims costs in cyclone and flood-prone regions, rather than excessive profits, are the main driver of these steep premiums, and that increasingly sophisticated pricing is exacerbating affordability problems for some consumers.3
In response to repeated large losses, insurers are also adjusting policy terms, increasing excesses for flood and cyclone cover, tightening definitions, and in some cases imposing coverage limits or exclusions for high-risk properties.19
Regulators and consumer advocates report instances where insurers have declined to renew cover or withdrawn certain products in the most exposed postcodes, effectively signalling that risk has moved beyond what private markets can comfortably carry.3
Affordability, accessibility and the rise of the “uninsurable”
New research commissioned by the New South Wales Government on home insurance affordability in a changing climate found that households already paying more than $2,000 a year for home insurance are disproportionately on incomes below $65,000.12
Under a high emissions scenario, the study projected that affordability pressure on vulnerable households could increase by 20 per cent as climate hazards intensify and risk-based pricing becomes more precise.12
The report warned of a “wicked problem”, where the places facing the greatest climate risk are also those with the lowest incomes and least capacity to pay for rising premiums or invest in resilience upgrades.12
The Climate Council’s recent survey on climate disasters and mental health found that one in 12 respondents said an extreme weather event had severely impacted them, and one in 20 had cancelled insurance because premiums had risen.9
Researchers noted that rising premiums are making it harder for Australians to protect themselves against worsening extreme weather events, and that cancelling cover shifts the risk of loss back onto households and governments.9
These dynamics are most acute for low-income households, older Australians, renters and regional communities already grappling with drought, coastal erosion or recurring flood, who may face homes that are effectively uninsurable or only insurable on terms they cannot meet.12
Vulnerability, mental health and economic resilience
Climate-related insurance stress is not only a balance sheet issue, it is a social one, with growing evidence of psychological strain in communities facing repeated disasters and financial insecurity.6
Australian research on drought-affected regions has linked reduced income security to increased stress, social isolation, relationship strain and higher suicide risk among farming communities, highlighting how climate shocks ripple through mental health and social cohesion.6
The Climate Council’s work on “climate trauma” documents how worries about climate disasters, rising insurance costs and the prospect of being unable to rebuild after the next event compound anxiety, particularly for young people and those with limited savings.9
Loss of insurance, or the knowledge that cover is partial or precarious, can undermine economic resilience by deterring investment, depressing property values and constraining small business lending in at-risk towns.3
For farmers, more frequent droughts, heatwaves and floods erode productivity and food security, and when insurance becomes unaffordable or unavailable, they face a harsher choice between self-insuring, over-leveraging or exiting the industry altogether.11
Tools, innovation and the reinsurance squeeze
Behind the scenes, insurers are investing heavily in climate risk modelling, drawing on data and scenarios from CSIRO, the Bureau of Meteorology and universities through initiatives such as the Climate Measurement Standards Initiative.12
These tools allow companies to map projected changes in floods, cyclones and bushfire weather at the suburb or even street level, feeding into pricing and portfolio decisions for home, business and farm policies.5
The Insurance Council of Australia’s Climate Change Roadmap sets out how the industry plans to reach net zero emissions and support climate resilience, including exploring parametric insurance products that pay out automatically when a hazard threshold is reached rather than after a traditional loss assessment.19
Global reinsurers, which provide a backstop for Australian insurers, are also tightening their appetites and raising prices in response to rising catastrophe losses worldwide, pushing costs back through to primary insurers and, ultimately, consumers.1
Internationally, public reinsurance and catastrophe schemes such as the United States’ National Flood Insurance Program and New Zealand’s Earthquake Commission illustrate how governments step in when private markets alone cannot provide affordable coverage for extreme perils, a model increasingly relevant to Australia’s climate exposures.4
Regulation, disclosure and the policy gap
The Australian Prudential Regulation Authority has launched an Insurance Climate Vulnerability Assessment with the five largest general insurers, designed to map how climate change could affect the affordability of general insurance and widen the protection gap.5
APRA’s framework asks insurers to model how many weeks of household income are required to pay premiums under different climate scenarios, linking physical risk, transition risk and customer capacity to pay.5
Alongside this, moves to strengthen climate-related financial disclosure are pushing insurers to spell out their exposure to climate risks and their plans to manage them, aligning with international standards that now expect large financial institutions to treat climate as a core prudential issue.15
Yet regulators have limited direct control over pricing, and affordability problems are often rooted in planning decisions that have allowed dense development in floodplains, bushfire-prone fringes and eroding coasts.8
The Productivity Commission has argued for a major shift in disaster funding, recommending that the Commonwealth reduce post-disaster recovery payments to states and increase mitigation funding, so that more public money is spent on avoiding future losses rather than rebuilding after they occur.8
Government interventions and international lessons
In 2022 the Australian Government established the cyclone and related flood damage reinsurance pool for northern Australia, operated by the Australian Reinsurance Pool Corporation, to reduce premiums for households and small businesses in high-risk regions.3
ACCC analysis suggests that, for policyholders in northern Australia, the pool is expected to cut average premiums by around 13 per cent for residential home insurance and 10 per cent for small business policies with building cover, with even greater savings for those currently paying the highest premiums.3
These moves echo international approaches where governments sponsor natural disaster insurance pools to share extreme risk, such as New Zealand’s Earthquake Commission and the United States’ public flood insurance scheme, which provide baseline cover while encouraging risk reduction over time.7
The Productivity Commission has warned that current disaster arrangements, where the Commonwealth often pays a large share of recovery costs, can blunt incentives for states and councils to invest in mitigation or to restrict risky development, and has called for disaster mitigation funding to be lifted to around $200 million a year and matched by states.8
Policy experts argue that modernising land use planning, upgrading building codes for future climate conditions, and investing in levees, firebreaks and nature-based defences can reduce both insured and uninsured losses, and ultimately stabilise insurance markets.5
The cost of gaps and the stakes for the economy
The Productivity Commission’s inquiry into natural disaster funding estimated that governments, insurers and households collectively face rising disaster costs, and that uninsured losses in particular flow back to taxpayers through relief payments and infrastructure repairs.2
A report for the Insurance Council of Australia has put annual average disaster costs, including insured and uninsured damage and government expenses, on a steep upward trajectory as extreme weather becomes more severe and widespread, warning that every taxpayer will contribute to the billions spent on recovery and higher insurance costs.5
When insurance becomes unaffordable or unavailable in key sectors, the macroeconomic implications extend from housing markets and mortgage lending to agricultural output and regional investment, as capital becomes wary of stranded or uninsurable assets.3
International analyses of regions facing partial or full insurance withdrawal note that loss of cover impairs community resilience by limiting resources for rebuilding and adaptation, and can entrench inequality as wealthier households shift to safer ground while others are left with devalued, risky properties.3
Future pathways and the politics of protection
Under lower warming pathways close to 1.5 degrees, climate scenarios used by regulators and insurers suggest that risk can still grow significantly, but remains more manageable if emissions fall rapidly and adaptation investment accelerates.20
At 2 degrees and beyond, physical risks escalate sharply, with more intense fire weather, heavier rainfall and higher sea levels, raising the likelihood that insurance in some locations will become either prohibitively expensive or conditional on major upgrades or relocation.1
APRA’s climate assessment work, while still in early stages, is designed to give policymakers a clearer view of how different emissions trajectories and adaptation choices could affect insurance affordability by 2030, 2040 and 2050.5
Community groups and social researchers emphasise that any move towards “managed retreat” from the riskiest areas must be carefully planned and supported, to avoid deepening trauma and disadvantage in communities already battered by disasters.6
For many stakeholders, from insurers and banks to local councils and farmers, the biggest opportunities lie in aligning climate policy, planning, infrastructure and financial regulation so that risk is reduced at its source, rather than simply repriced onto those least able to bear it.19
What other countries reveal
Australia is not alone in grappling with climate-driven insurance crises, and international experience offers both cautionary tales and models for reform.4
Government-sponsored schemes in places like New Zealand and the United States show that public reinsurance pools can maintain basic coverage for catastrophic risks, but also highlight the challenges of balancing affordability, fiscal exposure and incentives for risk reduction.7
Global market analyses note that climate risk insurance is growing fastest in Asia–Pacific as governments and insurers develop parametric and microinsurance products for farmers and low-income households, pointing to the potential for more innovative risk-sharing mechanisms in Australia’s own high-risk regions.1
Five-year priorities for regional planners and policymakers
Over the next five years, regional planners and policymakers face a narrow window to reduce long-term insurance risk by tightening land use planning in floodplains and fire-prone fringes, directing new development to safer ground and embedding future climate projections into zoning decisions.8
They will need to accelerate upgrades to building codes and retrofits, invest in protective infrastructure and nature-based defences, expand targeted support for vulnerable households and small businesses, and ensure that emissions reduction and adaptation strategies work together to keep communities both insurable and safe as the climate continues to change.5
References
1. CSIRO & Bureau of Meteorology, “State of the Climate”
2. Productivity Commission, “Natural Disaster Funding: Inquiry Report”
3. ACCC, “Insurance Monitoring Report 2022”
4. OECD, “The Role of Catastrophe Risk Insurance Programmes”
5. McKell Institute & Insurance Council of Australia, “Building resilience in the face of disaster”
6. Fritze et al., “Climate change and the promotion of mental health and wellbeing”
7. McAneney et al., “Government-sponsored natural disaster insurance pools”
8. Productivity Commission, “Natural Disaster Funding: Draft Report”
9. Climate Council, “Climate Trauma: The Growing Toll of Climate Change on Mental Health in Australia”
10. CSIRO, “Australia’s changing climate”
11. NSW Government, “Rising climate risks: Why accessible, affordable home insurance is under threat”
12. Insurance Council of Australia, “Climate Action: A Roadmap for a Sustainable Future”
13. APRA, “APRA releases details on insurance Climate Vulnerability Assessment”
14. AFAC, “Climate Change and Disasters: Key Messages and Resources”
15. APRA, “Insurance Climate Vulnerability Assessment”
16. Insurance Council of Australia, “Climate Change Roadmap: Towards a Net-Zero and Resilient Future”
17. Bureau of Meteorology, “State of the Climate 2024: At a glance”
18. Future Proof, “Insurance in an age of climate chaos: When entire regions become uninsurable”
19. Intel Market Research, “Climate Risk Insurance Market Outlook 2025–2032”
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