APRA warns climate-driven insurance premium rises could increase financial risk
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The news: The Australian Prudential Regulatory Authority (APRA) has released its Insurance Climate Vulnerability Assessment (ICVA), which found that climate-driven pressures on premiums could widen Australia’s insurance protection gap and increase financial risks across the system.
The context: The ICVA examined home insurance coverage under two scenarios; one reflecting higher physical risks from extreme weather events, and another incorporating the economic impacts of the transition to a lower emissions economy.
APRA estimates that around one in seven Australian homes are currently uninsured. Under both scenarios, this could rise to one in four by 2050, representing an additional one million homes without adequate coverage.
According to the report, regional and rural communities are expected to be disproportionately affected, with uninsured rates exceeding 40% in some areas under both scenarios by 2050.
APRA said worsening extreme weather, combined with inflationary pressures, rising asset values and insurance taxes, is widening the gap between households that can and cannot access insurance in highest risk areas.
The Insurance Council of Australia said the industry is calling on governments to increase investment in extreme weather mitigation, including establishing a flood defence fund to help address the estimated $6 billion annual economic cost of flooding.
What they 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,” APRA member Suzanne Smith said.
The sources: APRA press release, Insurance Council of Australia press release
