How extreme weather and costs of housing and insurance trap some households in a vicious cycle

Climate change is increasing the risk of extreme weather events for Australian households. Floods and bushfires are becoming more likely and severe. As a result, household insurance costs are soaring – tripling in some cases. High-risk areas might even become uninsurable.

The national housing crisis is pushing low-income households in particular to seek affordable housing in areas at risk of flooding. There they can become trapped in a vicious cycle. Unable to pay soaring insurance premiums in these areas, they also can’t afford housing elsewhere.

The regulation of housing in Australia traditionally relies on well-informed buyers being responsible for managing the risks. But our new study found home buyers are often not aware of the long-term risks.

Only after they’ve bought the home do they start thinking about these risks. When faced with unexpected high insurance costs, many opt to take the risk of being underinsured or even uninsured. This leaves them highly vulnerable.

The National Strategy for Disaster Resilience promotes a shared-responsibility concept. However, we found the main responsibility still lies with households. And they are not equipped to cope with the increasing complexity, impacts and costs of extreme weather events.

What’s wrong with the current approach?

The uncertain knowledge about future extreme weather events is challenging the traditional prioritising of individual responsibility. It’s becoming even harder for households to make informed decisions based on past experiences.

Government efforts to regulate increasing flooding events might not be effective when households do not want to relocate or cannot afford housing elsewhere.

Governments are also under pressure to jump in to compensate households for the costs of extreme weather damage.

Our research found a number of issues prevent efficient regulation:

• stakeholders such as the insurance industry and home lenders face legal hurdles to sharing data and giving financial advice for housing in high-risk areas

• well-intended measures such as buybacks and planned relocations can fail when they do not relate to people’s experiences and life situation, such as limited financial resources and deep connections to a place and community

• households’ motivation to insure themselves might decrease if they can expect government to provide compensation as a de facto last insurer.

Who is responsible for what?

In Australia, responsibility for managing extreme weather events is roughly divided among three main stakeholders: the three levels of government, businesses and households.

Within the three levels of government, states and territories bear the main responsibility for managing extreme weather events. They do so through disaster risk management plans and policies, hazard prevention and land-use planning.

Yet housing is still built in flood-prone regions. It happens where commercial interests conflict with regional planning, and governments are under pressure to deliver housing for growing populations.

After extreme weather hits, house and contents insurance cover is key for a household to recover. But insurance costs are based on the risk of events such as flooding. As these risks rise, premiums may also increase and become unaffordable. The Climate Council estimates one out of 25 properties will even become uninsurable by 2030.

When housing is built in at-risk areas, under the current system home buyers are largely responsible for informing themselves about the risks of floods, bushfires and other natural disasters. Our research suggests many are struggling to estimate what insurance is likely to cost them.

To prepare for these costs before they invest in a home, they must assess their own risk, know the value of their house and contents and calculate the costs of rebuilding after a disaster. They must also take into account increasing costs for builders and materials after an extreme weather event.

Climate change is making these already complex calculations even more difficult.

Our study is based on interviews with 26 insurance, legal, financial, policy and urban planning experts. Despite the National Strategy for Disaster Resilience’s concept of shared responsibility, we found most of the burden still falls on households.

Yet households often lack the knowledge to assess the risks. The data and information are either unavailable, or hard to access and understand.

These difficulties, coupled with the complex language of insurance contracts, contribute to high numbers of underinsured and uninsured households.

The Australian government responded in 2022 by setting up a cyclone reinsurance pool. Its aim is to keep premiums for households and businesses affordable.

There are also government buyback programs or relocation plans to move people out of high-risk regions. As noted above, though, these don’t always suit households when offered away from their communities or full costs aren’t adequately covered.

Governments must take on more responsibility

According to the experts we interviewed, households are no longer able to carry the main responsibilities for managing the risks of climate change. Government must take on more responsibility.

At the local level, councils need to better educate their staff on climate change risks. They should ban housing development in at-risk areas.

Better information and data sharing among stakeholders such as insurers and governments will also be crucial. Such data and information also need to be made more accessible and easier for households to understand.

In a climate change world, increasing extreme weather events result in new complexities. Households are not able to assess these new risks and complexities to make well-informed decisions.

Australia needs stronger sharing of responsibilities between different stakeholders such as insurers, governments and households. This includes changes to laws on information and data sharing between insurers, governments and households, bans on building in high-risk areas, and better advice about the costs of buying in high-risk regions.