This article is republished from The Conversation under a Creative Commons licence. Read the original article.

Late winter and early spring has been marked by wild weather sweeping large parts of Australia, damaging homes and businesses, and causing power outages.

Such unpredictable weather is also occurring around the world and driving huge rises in premiums to the point where the future of insurance is in doubt.

In 2022, floods, hurricanes, hailstorms, winter storms and droughts amounted to more than A$149 billion in insured losses globally with losses growing five years prior.

The full impact and cost of the latest events in Australia will not be known for some time, but it can be expected to be significant.

Extreme weather

As one of the world’s most climate exposed nations, Australia is at the forefront of extreme weather effects on insurance premiums.

In the “great deluge” of 2022, flooding in Queensland and New South Wales amounted to A$5.56 billion in insured losses from 236,000 individual claims.

As extreme weather generates ever-greater losses, insurers are reluctant to provide cover in higher-risk locations. Increasingly they are not offering policies, making insurance unavailable, or raising premiums to unaffordable levels.

One insurer reported between 2020 and 2023, their average household premium rose by 56%.

And the situation is worsening.

Insurance stress

In 2022, 10% of Australian households faced extreme insurance stress, defined as paying more than four weeks’ gross household income for a policy.

By 2024, this rose to 15% of Australian households, with the most stressed households facing premiums of up to 9.6 weeks, or 18% of their gross income.

This measure of insurance stress is based on gross household income. Yet premiums are paid from net income after tax. “Many households simply cannot afford insurance with the Australian Competition and Consumer Commission estimating at least 11%  of Australian properties are uninsured and up to 40% in the most exposed areas.”

In June 2024, the Australian Bureau of Statistics noted insurance is one of the main contributors to rising living costs across all household types.

Unsurprisingly, when needing to pay energy bills, put food on the table, and fuel in the car, many Australians have little choice but to let insurance lapse. Otherwise, they may buy less insurance than they need to recover after a weather event.

Why we can’t rely on insurance

Even for those who are insured, widespread loss from extreme weather means they cannot necessarily rely on their insurance claims to bounce back from disaster.

Large numbers of claims can result in lengthy settlements, as insurer resources are stretched by the complexity of assessing damage, and the increased demand on trades and services, including temporary accommodation.

Excess demand following widespread loss has effects beyond emotionally charged claims processes, as insurers are using cash settlements to resolve claims quickly.

Cash settlements can be offered when the homeowner is underinsured and the policy will not cover full repairs, when there is a lack of trades and services to complete the work, or when homeowners are desperate to get some compensation to help them move on from disaster.

However, there are serious financial implications for homeowners in accepting cash. Recent research reveals cash settlements are often under-quoted and homeowners lack appropriate knowledge and experience to accurately assess the offer.

As a result, this can leave homeowners without enough money to fix their property, potentially leaving them with an unlivable home and large debt.

Economic impacts

A lack of affordable insurance also has significant negative consequences for Australia’s economy.

Home insurance is usually required to take out a mortgage. However, about 5% of Australian households with a mortgage are experiencing insurance stress.

Such insurance-stressed homeowners are in a precarious financial situation following extreme weather losses, as they have insufficient funds to repair their home and/or repay their mortgage.

Potential homeowners are also affected, as they may be unable to get a mortgage in higher-risk locations, as banks anticipate insurance will be unavailable or unaffordable.

With as many as one in 25 homes across Australia expected to be uninsurable by 2030 and one in seven homes in the most at-risk localities, this looming mortgage crisis will have wide-reaching implications beyond home ownership.

Mortgages are critical for business lending, to support the rental market and ensure viable communities.

A bleak forecast

The compounding effects of insurance stress, extreme weather, and pressure on banks to take account of climate exposure is likely to limit lending to small business, constrain housing supply, and affect jobs, especially in higher-risk locations.

This complex situation is already evident across cyclone-exposed northern Australia, where the impact of rapidly rising premiums, or a lack of insurance availability, means small business owners, such as tourism and hospitality operators, struggle to meet licensing and regulatory requirements.

This is forcing many to reconsider their future viability.

Given Australia’s reliance on home ownership for economic security, a robust rental market to support jobs, and viable small businesses to support vibrant communities, the effects of extreme weather on insurance availability and affordability are set to affect us all.

Professor Paula Jarzabkowski and Dr Katie Meissner share their top tips to help everyday Australians and businesses navigate the uncertainties around the future of insurance.

1. Review your insurance contract with a fine-tooth comb

“As floods, bushfires and cyclones become more frequent, many people will come to find they’re uninsured or underinsured,” Professor Jarzabkowski said.

“It’s important to carefully read your insurance contract and product disclosure statement. If something seems too good to be true, it probably is. For example, your contract may have built-in exclusion clauses that could mean you're not covered for certain situations you assumed were protected.

“So, I’d advise all Australians – homeowners, business owners and renters – to be discerning consumers and know what you're covered for.

“If you don’t have full coverage but can afford it, it may be worth your peace of mind to pay more, provided it’s the right product for you.”

Professor Jarzabkowski said individuals and business owners should consider their risk profile and have a plan in place for anything that isn’t covered.

“If you can’t afford full insurance cover, you need to think about how to minimise the amount of loss you’ll have in the event of, say, a flood or a fire,” she said. 

“Start to think about things like making sure your gutters are clean so they don’t overflow, or moving your furniture to the top floor of your house when there’s a flood warning in your area.

“Minimising your loss is a good idea even if you’re insured, but it will be essential if you’re not.”

2. Consider the available data and ask questions

 Dr Meissner encouraged all Australians to access their local council’s flood mapping data when making decisions about real estate.    

 “If you’re considering buying, renting, or leasing a property, you should inspect the local area flood maps to understand your risk profile,” Dr Meissner said.

 “It’s also wise to ask about the flood and insurance history of the property you’re interested in. If the homeowner or business owner can't show you an insurance certificate for their property, that’s a red flag.

 “Individuals and business owners should aim to do their due diligence wherever possible to determine if the property they’re interested in is insurable.”

3. Access community resources to prepare for natural disasters

“Increasingly, we’re seeing community organisations provide information to individuals and businesses around preparing for future natural disasters,” Professor Jarzabkowski said.

“Take Resilient Kurilpa, a community network that has developed an entire suite of resources to help plan for floods and minimise risk in flood-prone Kurilpa.  

“The resources on their website include recorded webinars, an apartment toolkit, a local flood map, and a flood library full of local stories and studies from past Brisbane floods.”

Professor Jarzabkowski said it was important for residents and business owners to start proactively “training” for these disasters and to connect with their local community for resources and assistance.  

4. Contact your local representatives

Professor Jarzabkowski encouraged all Australians to tap into their inner activist.

“Contact your local councillors and government representatives and ask them not to approve developments in flood zones,” she said.

“Yes, we’re in the middle of a housing crisis, but building houses in the path of floods, cyclones, and fires won’t fix the crisis – it will only cause more heartache.

“Be an activist, know what's going on in your area and expect that your councillors and your MPs are there to help manage that risk.”