As climate change impacts continue, home insurance can be made fairer for the hundreds of thousands with homes at risk from floods and fires, writes Jeremy Moss.
OUR CURRENT MODEL of home insurance is not fit for purpose as we continue to face escalating climate disasters. The sharp rise in complaints over insurance claims to the Australian Finance Complaints Authority (AFCA) and struggles for people who can no longer insure their homes will only increase unless there is a reset on how we as a society do home insurance differently.
The frequency and severity of climate extremes are increasing at an alarming rate. Calculations by Climate Risk predict that more than 445,000 Australian homes will be uninsurable to fire within 30 years, with this number rising to 718,000 by 2100.
But it’s riverine flooding that poses the greatest insurance risk, making up 80% of properties considered uninsurable by 2030. According to a recent Climate Council report, across Australia, 2.5% of properties (360,691 properties) will be at ‘high risk’ of riverine flooding by 2030, with a further 372,684 at ‘medium risk’ of riverine flooding.
It is vital that there is some mechanism for people in these disaster zones to affordably insure these homes. It is unfair to transfer the risk of floods and bushfires onto households, especially vulnerable ones.
This is a serious climate justice issue we need to address if we are to have a fair climate transition.
Instead of expecting all homeowners to bear the risk of loss in the current market-based model, I propose we should adopt a model based on “fairness as social justice” — as outlined in a recent report produced at UNSW. Insurance for the provision of goods that are basic requirements of life – such as housing or health – should be provided independently of individuals’ risks and choices, at least up to a minimum value.
Australia’s current medical care system is operated according to this model, with Medicare providing medical treatment to individuals at low or no cost, regardless of their risks and choices.
Moreover, the risk of bushfires and floods has been (at least partially) caused by decades of government inaction on climate change. Australia is one of the highest per capita emitters of greenhouse gases (GHGs) and one of the world’s largest exporters of coal and liquid natural gas (LNG).
One way in which governments can take responsibility and bring down the cost of insurance premiums is through disaster mitigation.
Action by the local council in Roma, Queensland is a great example. After four floods in five years, some insurance companies entirely refused to provide coverage to homeowners. The local council spent $16 million on building a levee — subsequently, locals’ insurance premiums were reduced by an average of 30% and up to 80% in some cases.
Currently, around 97% of all federal funds spent on disasters are spent after a disaster occurs. This is despite the fact that a dollar spent on mitigation tends to reap a saving of around five dollars in post-disaster damages. Indeed, the Productivity Commission has noted that the Federal Government’s inherited approach to disaster relief is rife with ‘ad hoc responses and short-term political opportunism’.
As Rob Whelan, executive director and CEO of the Insurance Council of Australia, notes:
“If appropriate mitigation and prevention is not done, some parts of Australia may become uninsurable in the future.”
Creating a fairer insurance model will need to be supported by reviewing building policies such as:
- implementing higher building standards (and subsidies) that lower the risk of a home being destroyed;
- providing incentives to encourage people not to build in some disaster-prone regions; and
- limiting or capping coverage to occupied dwellings (that are inhabited for more than 183 days in a calendar year).
This will be particularly important for investment properties, that are the primary dwelling of the tenants and thus may require coverage by the landlord in order to ensure that tenants are not deprived of their basic goods.
A climate transition cannot simply be about reducing emissions or adapting to risk. A transition must also be just and that means our response needs to reflect a robust set of values.
Australia can no longer operate its current disaster insurance regime according to the current model. Under this approach, many Australian homes will be uninsurable, leaving the owners of those properties vulnerable to destitution. We will see the creation of uninsurable “ghettoes” and the social blight of growing inequality between poorer and more affluent suburbs.
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