As climate and cost pressures mount, Australia’s prudential regulator has warned that a mounting home insurance gap could weaken the country’s financial guardrails.
The Australian Prudential Regulation Authority (APRA) has used its Insurance Climate Vulnerability Assessment to test how climate change and economic transition pressures could erode home insurance coverage and, in turn, the resilience of the nation’s housing finance system.
APRA modelled how severe, yet realistic global climate pathways could reshape the cost and availability of home insurance out to 2050.
The exercise focused on how shifts in premiums and coverage flowed through to risks for banks and insurers, rather than on year‑by‑year profit outcomes.
The assessment explored two global scenarios – one in which climate risks dominated, with freak weather events striking more often and intensely and another where the strains from the transition to a lower‑emissions economy weighed more heavily on growth and costs.
APRA stressed that the work was not a prediction, but rather a way of testing how the system would cope if the pressures materialised.
It estimated that a significant minority of homes were already without cover, with roughly one in seven houses uninsured.
Under both scenarios, APRA said the non‑insurance rate would drift higher over time, reaching around one in four dwellings by mid‑century.
That would see an additional 1 million households living with inadequate or no home insurance, even as climate‑related damage escalated.
The impact was sharpest outside the capitals, with regional and rural communities forecast to see the steepest rise in the protection gap.
By 2050, the share of uninsured homes in some country areas is projected to climb beyond 40 per cent, entrenching a stark divide between better‑insured urban markets and more vulnerable regional towns.
Different climate pathways, same affordability squeeze
Although both scenarios lead to thinner insurance coverage, the mechanics differ.
In the pathway dominated by physical climate risk, the main driver is a jump in claims costs as destructive weather events become increasingly common and severe.
APRA’s modelling suggests that the expected value of annual weather‑related losses would more than double between 2026 and 2050, placing heavy pressure on insurers’ pricing.
In the transition‑risk‑heavy scenario, weather damage still grew, yet the larger takeaway was what happened to building and repair costs.
It found persistent increases in construction expenses – including labour shortages, materials inflation, and the cost of rebuilding to higher standards – would become the central force lifting premiums.
From household losses to collateral and system risk
The report outlined that as coverage dwindled, the distribution of losses after extreme weather events would shift, with less absorbed by insurers and more landing on households, banks, and governments.
The regulator warned that this dynamic could steadily undermine the shock‑absorbing capacity of the financial system.
APRA executive board member Suzanne Smith underlined how central insurance was to the system, stressing that cover was a key way large, infrequent losses were moved off household and lender balance sheets.
“When homes are uninsured or underinsured, losses are more likely to be borne directly by households, banks or by the government,” she said.
Smith said the danger was starkest when falling levels of insurance and rising climate‑driven losses collided.
APRA concluded that a “widening protection gap” would leave more households carrying uninsured losses, push up credit risk for banks, and stifle the growth prospects of the home insurance sector.
Call for mitigation, adaptation, and market innovation
Against that backdrop, APRA said it wanted to see a broader, co-ordinated response that went beyond premium subsidies or short‑term relief.
Smith said that the most efficient path to affordable cover was to reduce the underlying risk profile of the housing stock and noted that this required efforts from governments, industry, and regulators alike.
“To support insurance affordability and availability and with that strengthen the resilience of our financial system, it is essential that all stakeholders work together to reduce exposure to weather‑related risks,” she said.
She said that this meant both emissions mitigation and on‑the‑ground adaptation, “such as building protective infrastructure, retrofitting existing homes and risk‑based land‑use planning”.
She also highlighted the role of product design and risk management in containing the flow of uninsured losses back into the financial sector.
“Supporting insurance affordability with innovative insurance solutions and better risk management will also help limit the flow of uninsured losses into the financial system over time,” she said.
“APRA will continue to engage with government, industry and other regulators to share insights and to support efforts to manage prudential risks associated with declining insurance coverage.”
[Related: Climate change could strip $500bn from property by 2030]
