Australia Weather News

Extreme weather costs Australians more and more each decade and as a country, we have some of the highest per capita economic and insurance losses in the world.

New data from the Insurance Council of Australia (ICA) has found that every decade since 1980, inflation-adjusted losses from floods, bushfires, storms and extreme cold temperatures have increased across the globe.

Insurance is fundamentally about understanding future risks, but as the costs of those risks skyrockets, its business model is increasingly under threat.

There is also a growing protection gap, meaning the difference between the amount of insurance in place and the actual cost of recovery is growing — with vulnerable people the most exposed.

Around the world, novel approaches are being trialled in a bid to ensure communities can recover quickly when natural disasters strike.

One of those models, parametric insurance, is being rolled out in the Pacific and is basically a bet on the weather.

If an agreed-upon trigger occurs — say, flooding to a certain level or cyclones with a certain wind speed — you get an automatic payout, without needing an assessment of your losses.

In Spain, a unique public-private partnership called Extraordinary Risk Insurance was set up in the aftermath of the civil war in 1941, and paid out around 4.5 billion euros ($8 billion) during last year's floods.

As climate-fuelled natural disasters continue to put pressure on the insurance industry abroad and at home, is it time for a rethink of how insurance works?

Quantifying the problem

Australia has some of the highest per capita losses from natural catastrophes in the world, consistently coming in only behind the United States, according to a new report from the ICA.

The report compared Australia with five other developed countries over the last five decades using the database of Munich Re, a global reinsurer providing insurance to insurance companies.

"Australia really is at the forefront of dealing with extreme weather events," ICA CEO Andrew Hall said.

"It's a challenge for insurance going forward."

The report estimated the financial cost of insured extreme weather over the past five years was about $22.5 billion, a 67 per cent jump from the previous five-year period.

There are multiple factors driving the escalating costs — climate change increasing, the severity of natural disasters, growing populations in harm's way, and infrastructure that was not built to withstand the impacts of a changing climate.

Mr Hall said it was critical that governments invested more in resilience programs to protect communities and properties.

"Projects like flood levees that will actually protect properties, projects like home strengthening against cyclone and bushfire risk," he said.

"These are the sorts of investments that make a material difference to homes, to be able to withstand the sort of challenges that they're facing."

Mr Hall said new homes needed to be built to withstand a future climate.

"As we think about the challenges moving forward, building more homes in Australia, we're going to have to make sure those homes are built in a durable and resilient way," he said.

Betting on the weather

While investment in resilience is a critical part of adapting to climate change, it's not the only area in need of reform.

Insurers have come under fire over recent years for exorbitant premiums in flood zones, not recognising resilience measures in reduced premiums, blacklisting whole suburbs they deem as too high risk, and being slow to pay out.

It means a growing number of people and businesses are unable to afford or access insurance.

But something called parametric insurance is on the rise.

It has been around since the 1990s, but has not been widely used, according to UNSW Climate Change Research Centre adjunct fellow Thomas Mortlock.

"It's really got a lot of traction recently, and it's filling a lot of gaps for areas where people can't either afford traditional indemnity-based insurance or it's not available," Dr Mortlock said.

"It's attractive because the payout is quick and it's very flexible — you can build a parametric around absolutely anything.

"For example, in northern Australia, we're seeing a lot of businesses taking up parametric insurance for business interruption associated with tropical cyclones."

Parametric insurance is essentially putting a bet on a certain weather event occurring, according to Mr Hall.

"It could be best described as a big bet where you agree with an insurer that if a certain event happens, you will receive a cash settlement immediately, [and] that there's no need for an assessment to be done," he said.

For example, a policyholder in a flood-prone area might agree on a trigger point with an insurance company — such as the flood level near their home reaching a certain height — and once this is reached, the payout is made.

In California, Fremont has become the first place to implement city-wide parametric flood insurance.

It has also been introduced in the Pacific through the Pacific Catastrophe Risk Insurance Company, initially launched by the World Bank.

"Basically, what they do is provide parametric insurance coverage at a sovereign level for Pacific Island states against cyclone and flood," Dr Mortlock said.

"The donor states help basically pay the premium for the sovereign entities.

"The idea being you have that insurance safety net there for the most vulnerable communities … so that they can actually repair, rebuild, [and] build back better after these events."

However, Mr Hall said there were downsides to using parametric insurance.

"What concerns us about parametric is that people could get a very large payout, but they're left with no help rebuilding," he said.

"Parametric is a very complicated product that, for a less sophisticated person seeking that sort of cover, they may not realise that they're not getting all the support and all the other elements that a traditional insurance product can deliver."

For wider use in residential areas, it would likely require some form of public funding to get off the ground, Dr Mortlock said.

"It hasn't been deployed at a wide scale for residential use as yet because it can be relatively expensive," he said.

"Parametric often works best when you have a very limited area that you're looking at."

It is part of a broader policy approach involving public-private partnerships and blended finance, where governments and industry work together to reduce risk and ensure affordability.

"It is a fine balance between profitability and affordability, and we're always walking that line," Dr Mortlock said.

"But we're in a situation now where there needs to be some considerable risk reduction done across the board to ensure the sustainability of the industry going forward."

Redistributing the risk

The Australian government has been investigating other models used overseas, including the UK, where the government set up a flood re-insurance scheme a decade ago.

The scheme is designed to cover properties most at risk through a levy system on all household insurers and provides funding for households to build back better.

Prior to the inception of Flood Re, the average home insurance quote for a household with a flood claim was around 4,400 British pounds ($8,960), as of December 2024, the average was 1,100 British pounds ($2,240).

Minister for Financial Services Daniel Mulino visited London last month and told the ABC he met with some of the major global reinsurers and brokers.

"There is a growing problem of access to insurance at the riskier end of the market, and it's very much worth us looking at these different approaches being implemented overseas," he said.

"I was actually impressed with how many different approaches are being adopted. I think it's actually going to give us a significant evidence base to work on."

In Australia, 77 per cent of properties at extreme risk of flooding do not have cover, according to the Insurance Council, with premiums in those areas exceeding $7,000 and even reaching $30,000.

"Insurers are getting more and more accurate data so they can identify which properties are at high risk more and more accurately," Mr Mulino said.

"And they are increasingly saying to both households and small businesses, 'We don't want to offer insurance.'"

The result is a two-tiered system, rather than a community-based pricing model, which has been used in the past, according to Dr Mortlock.

"Those that didn't have flood and cyclone risk [have historically] cross-subsidised the properties that do," he said.

"I think to a certain extent, the data and analytics that we now have, where we can denote the flood risk on one side of the road compared to the other, has led to a situation where people who have flood risk are paying for their own flood risk."

Governments around the world are increasingly stepping in to bridge the growing protection gap left as a result, sometimes using parametric insurance.

"It becomes a very political and socialised issue," Dr Mortlock said.

"We see it in the UK … there's quite an effective one in Spain, which mopped up a lot of the losses from the Valencia floods last year, and to a certain extent, there's also some in California."

Calm before the storm

It has been a relatively quiet year for natural disasters in Australia, with insurance losses from the last 12 months coming in at $2.1 billion — the lowest they have been in six years.

That is despite Cyclone Alfred threatening large communities along the East Coast, with an insurance bill of $1.43 billion.

It is a welcome reprieve for the insurance industry, with a return to healthy profits and downward pressure on premiums.

But the industry is not complacent about the long-term trends.

"Insurance profitability is cyclical, and it's largely being driven by weather events," Mr Hall said.

"Over the past 12 months, insurers have been returning to profitability.

"But if we look back over the last 10 years, in each of those years where we have significantly large events, profits dip or we go into a loss. In fact, over the last decade, over the majority of the time, insurers have lost money from home contents more than they have made."

Mr Hall said globally, the reinsurance market was also very fragile.

"We only need another large wildfire in California, a hurricane in Florida, an earthquake in Japan — these are the sorts of things that send shock-waves around the world."