Home insurance dilemma

I live on the side of a hill in a generally elevated area so my exposure to flood risk is nil. So I was rather unhappy that my most recent annual insurance premium was around $2,000. So it is obvious that people in flood-prone areas must be much more heavily hit in order to insure their properties. And Australia has been having a lot of flooding recently

The actuaries have to be realistic. Premiums must reflect the probability of a successful claim. And in areas where natural hazards are great, that means that premiums have to be very large -- so large as to be unaffordable in unlucky cases.

There is no cure for it. The value of a house is large so any payour will be large. And a lot of large payouts could bankrupt the insurers. So they have to recover enough money to cover their claims. And that can mean sky-high premiums.

In the circumstances many people will go uninsured. They will have to cover their own risks however they can. And unless they are big savers when the expected adverse events happen, they will be without a home and penniless.

Governments can sometimes do something to help the most disastrously affected people. Some governments offer "buybacks" of flooded properties but the cost ensures that only a few people can be helped in that way.

The real solution is for people to stop setting up house in endangered areas. That would denude whole suburbs if it was widely done, however, so is likely to be done to only a small extent.

A small consolation is that the price of a home in a badly affected area will be significantly reduced but whether buying there is worth the gamble has to be an individual and personal decision.

One million households in Australia already face “extreme” levels of insurance stress and will bear the brunt of future premium hikes.

The report, prepared by analytics firm Finity Consulting and commissioned by the Actuaries Institute, examines the cost and affordability of home insurance this year and in 2050, in both a high-emissions and low-emissions future.

Previous estimates have found that by 2030, more than half a million homes would be “uninsurable” because of spiralling premiums.

This latest research is even more dire.

Vulnerable households – defined in the report as the one in ten households spending the largest share of income on insurance – currently pay an average of 7.4 weeks’ pre-tax income on their premiums.

This compares to an average of one week of income paid by the rest of the population.

“That it is already as much as 10 per cent of households, or 1 million households, that was surprising. I didn’t think it was that bad,” says Sharanjit Paddam, the report’s lead author.

Previous research into household insurance risks did not include income in their calculations, and may not accurately reflect what is affordable for different households.

This report defines “extreme affordability pressure” as more than four weeks’ pre-tax income – a threshold that aligns with other research on financial stress and vulnerable populations.

“This is not just a problem about the cost of insurance; it’s also a problem of people’s ability to pay,” says Mr Paddam, an actuary with Finity’s climate and ESG practice.

“So, if [other reports] are talking about 500,000 [uninsurable homes] by 2030, then we think that we’re already there.”

Every neighbourhood has vulnerable residents

While vulnerable households are concentrated in northern Queensland, the Northern Territory and northern New South Wales, the report emphasises that vulnerable households exist in every council area in Australia.

Some of the most vulnerable populations are in metropolitan or inner-city locations.

In the City of Melbourne, for example, one in five households is under extreme affordability pressure, while in the City of Adelaide, it’s one in 11.

In both these local government areas (LGAs), the annual insurance premium already costs some residents, including retirees, more than 20 weeks’ income, a nominal figure indicating they effectively have no income.

In the City of Sydney, where one in seven households is vulnerable, the median household in this group spends an average of 5.8 weeks’ income on the annual premium.

“People on low incomes are impacted first, worst and longest by extreme weather events … because they don’t have the same financial means to cope, adapt, and recover,” says Kellie Caught, Australian Council of Social Service (ACOSS) climate and energy program director.

On top of that, low-cost housing, including rental properties, tends to be in higher-risk areas, like flood or bushfire zones, and built to poorer standards.

This overlap between climate risk and socioeconomic disadvantage means the most vulnerable people are likely to live in the least resilient housing and in the riskiest areas. “Because that’s what they can afford,” Ms Caught says.

Half of households paying premiums of more than $2,000 earn less than $65,000, according to the report.

“Retirees, individuals over 60, and single adult households are very much in the vulnerable group,” Mr Paddam says.

They are also more likely to be single parents or living alone, women, renting, and to have low insurance literacy and low savings.

“The reality is that the people who are most impacted by natural disasters are often low socioeconomic status … and don’t have the capability to move or to pay to improve their homes,” says Actuaries Institute chief executive Elayne Grace.

And when catastrophe strikes, the financial and emotional toll can be unbearable, Ms Caught says.

It’s not just the task of rebuilding an uninsured home. Families are usually hit with pricier food, rent and other essentials as the area struggles to recover, while moving elsewhere often means leaving jobs, schools and support networks, she says.

“So you just have these compounding factors that have a significant impact on your ability to keep your head above the water …. I mean, there’s a breaking point, right?”


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