The Australian Prudential Regulation Authority (APRA) has released the Insurance Climate Vulnerability Assessment (Insurance CVA), a prudential stress test that shows how climate-driven premium pressures can significantly widen the household insurance protection gap and weaken the resilience of Australia’s financial system.
APRA’s insurance CVA examines how home insurance cover is expected to decline by 2050 under two severe but possible global climate-related scenarios. One scenario involves higher physical risks from weather-related events, while the other involves greater economic impacts from the transition to a low-emissions economy.
APRA estimates that around one in seven homes in Australia are currently uninsured. Under both stress scenarios, this proportion could rise to about a quarter by 2050, equivalent to 1 million additional households without adequate insurance.
The stress tests also found that regions and rural communities will be disproportionately affected, with coverage gaps widening in areas where insurance coverage is already low. By 2050, this share in rural areas could exceed 40% under both scenarios.
Where physical risks are higher, increased losses from more frequent and severe weather events can push premiums higher. It is projected that overall annual losses from weather-related events could increase to more than $16 billion by 2050, from about $7 billion today.
In cases of higher transition risk, weather losses are a contributing factor, but less severe. However, continued significant growth in construction costs has pushed premiums higher.
APRA noted that the widening protection gap could increase uninsured losses to households, increase credit risk to banks in high-risk areas, and limit the growth of the household insurance market, ultimately weakening the resilience of Australia’s financial system.
APRA member Suzanne Smith said: “Insurance plays a vital role in Australia’s financial system, shifting significant financial losses from households and lenders to insurers and reinsurers who are better equipped to absorb losses. When households are uninsured or underinsured, losses are more likely to be borne directly by households, banks or the government.”
“To support the affordability and availability of insurance, and strengthen the resilience of our financial system, all stakeholders must work together to reduce weather-related risks. This includes reducing emissions and risk adaptation to increase the resilience of Australia’s housing stock, such as building protective infrastructure, retrofitting existing homes and risk-based land use planning. Supporting insurance affordability through 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 work with government, industry and other regulators to share insights and support efforts to manage prudential risks associated with declines in insurance coverage.”
The Australian Prudential Regulation Authority (APRA) has warned that climate stress could widen Australia’s home insurance protection gap.
