The first phase of uninhabitability is uninsurability

The first phase of uninhabitability is uninsurability – Michael Mann, renowned climate scientist.

As climate risks to property increase, the people who live in places exposed to those risk are less and less able to afford to insure their properties. Which will start to create climate ghettos. And the housing crisis in Australia will worsen, as areas in areas with high risk of disaster become uninsurable.

The Actuaries Institute has updated its report on Insurance affordability. It makes for sobering reading.  The median home insurance premium across Australia has increased by 28% in the 12 months to 31 March 2023. But for high risk properties, insurance premiums have gone up much more – 50% for the 5% of households paying the highest premiums. High insurance premiums mostly come about for people who live in areas exposed to things like storm, flood, cyclone, bushfire. And the risk of those disasters has gone up much more than the less extreme events that home insurance covers, even though those costs have also gone up.

And as the actuaries point out, those households living in high risk areas are also more likely to be unable to afford their premiums.  Partly because high insurance premiums largely arise from exposure to natural perils, such as storm, cyclone, bushfire etc, and the centre of major cities are the least exposed to those sources of loss. And partly because houses on flood plains and on the fringes of cities are generally cheaper, so people with lower incomes tend to move there.

Affordability stressed households are largely in rural and regional areas, and are least able to afford the higher premiums, which have increased faster in those areas. And areas with a high proportion of affordability stressed households are significantly more exposed to extreme weather events. For example in NSW, insurance affordability stressed households have premium rates 79% higher than non stressed households (nearly a $2,000 difference), driven largely by increased chance of flood in those areas.

It reminds me of a comment made by Michael Mann, renowned climate scientist, when he was here in Australia during the black summer bushfire season.

The first phase of uninhabitability is uninsurability.

As climate risks get higher and higher, the people who live in places exposed to those risk are less and less able to afford to insure their properties. Which will start to create climate ghettos, with uninsured housing stock, which will be increasingly damaged or unlivable as disasters strike more often. And the housing crisis in Australia, which did not start for climate related reasons, will become worse and worse as areas in areas with high risk of disaster become uninsurable.

So what should Australia do about that? The Insurance Council of Australia has some proposals, which I’ll cover in my next post.