The Australian Prudential Regulation Authority (APRA) has released its Insurance Climate Vulnerability Assessment (Insurance CVA), a prudential stress test showing how climate-driven pressures on insurance premiums could significantly widen the home insurance protection gap and weaken the resilience of Australia’s financial system.
APRA’s Insurance CVA examined how home insurance coverage may fall under two severe but plausible global climate-related scenarios projected out to 2050. One scenario involved higher physical risks from weather-related events, while the other involved greater economic impacts from transitioning to a lower emissions economy.
APRA estimates that around one in seven Australian houses are uninsured today. Under both stress scenarios this could rise to around one in four by 2050 – equivalent to an additional one million homes without adequate insurance.
The stress test also found that regional and rural communities would be disproportionately affected, with the protection gap widening more sharply in areas that already have lower levels of insurance coverage. It could exceed 40% in rural areas under both scenarios by 2050.
In the higher physical risk scenario, rising losses from more frequent and severe weather events push premiums higher. Overall expected annual losses from weather-related events could increase from around $7 billion today to more than $16 billion by 2050.
In the higher transition risk scenario, weather losses are a contributing factor but are less severe. However, significant and ongoing increases in construction costs push premiums higher.
APRA noted that a widening protection gap could increase uninsured losses for households, heighten credit risk for banks in high-risk regions, and constrain growth in the home insurance market, ultimately eroding the resilience of Australia’s financial system.
Suzanne Smith, an APRA Member, said, “Insurance plays a critical role in Australia’s financial system by shifting large financial losses away from households and lenders to insurers and reinsurers that are better equipped to absorb them. When homes are uninsured or underinsured, losses are more likely to be borne directly by households, banks or by the government.
“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. This includes emissions mitigation and risk adaptation that strengthens the resilience of Australia’s housing stock, such as building protective infrastructure, retrofitting existing homes and risk-based land-use planning. 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.
“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.”
