Economist warns of growing underinsurance crisis in Australia

Lessons from Los Angeles bushfires shared

Economist warns of growing underinsurance crisis in Australia

Catastrophe & Flood

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Economist and Climate Council councillor Nicki Hutley has warned that Australia could face a future where large portions of the population are unable to obtain affordable insurance as climate change intensifies the frequency and severity of natural disasters.

Drawing parallels with recent wildfires in Los Angeles, Hutley (pictured) highlighted the rising costs and risks that are already reshaping the Australian insurance market.

Underinsurance in Australia

Hutley noted a 2022 Climate Council report that found that by 2030, 4% of Australian properties could become uninsurable. The issue is particularly severe in high-risk areas like Shepparton in Victoria, where up to 90% of homes may be affected.

Insurance premiums have risen sharply – up 28% between March 2022 and September 2024 – driven by a combination of rising claims, increased reinsurance costs, and climbing construction expenses.

In her opinion piece at The Guardian, Hutley emphasised that climate change is not just an environmental issue; it’s an economic one. She added that as risks increase, insurers will be forced to continue adjusting premiums, making coverage even less accessible for households in vulnerable areas.

Insurance industry struggles with mounting challenges 

The Insurance Council of Australia (ICA) echoed Hutley’s concerns, noting that climate-related disasters such as floods, cyclones, and bushfires are becoming more frequent and severe.

In a statement, the ICA highlighted the financial strain on insurers and reinsurers, compounded by inflation and higher asset values in disaster-prone areas.

“There is no simple solution to this problem, but as an industry that prices [risk], the most sustainable way to reduce rising pressure on insurance [premiums] is to reduce the underlying risk,” it said.

Investing in resilience 

Both Hutley and the ICA have advocated for substantial investments in resilience and disaster mitigation efforts. Suggested actions include:

  • retrofitting homes and businesses with materials and designs better suited to withstand disasters
  • strengthening land-use planning policies to prevent construction in areas prone to extreme weather events
  • building protective infrastructure, such as levees and firebreaks, to safeguard communities

Improved data access is also critical, they said, to help developers and potential homeowners make informed decisions about risks associated with specific locations.

Economic and social implications 

While the cost of resilience measures may be significant, Hutley argued that they are necessary to avoid even greater economic losses from future disasters.

In cases where risks are too high, relocation may be unavoidable. Programs such as government-backed property buy-backs, already implemented in some Australian regions, could provide a framework for managing these transitions.

Lessons from Los Angeles 

The recent wildfires in California underscore the urgency of Australia’s own challenges. Some residents in high-risk areas of California have found themselves unable to secure insurance coverage at any price. This situation, Hutley warned, could become a reality for Australians if climate risks are not addressed.

The ICA has similarly cautioned against temporary solutions, such as capping premiums or implementing government-run insurance schemes, noting that these approaches could lead to unsustainable economic pressures. Instead, the focus must remain on reducing risks at their source.

Urgent need for climate action 

Both Hutley and the ICA stressed that rising global temperatures are creating a feedback loop of increased disaster costs and insurance unaffordability.

“If we fail to take strong action on climate now, that drama will only intensify, for ourselves and our children,” Hutley said, calling for stronger collaboration between governments, insurers, and communities to address climate risks.

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