As we watch the horror of the Los Angeles fires, Australians are painfully reminded of our own vulnerability to climate change, which continues to exacerbate the impact and frequency of these unnatural disasters.
The images of loss and destruction in LA are particularly painful to those who have experienced such losses first-hand in Australia.
But our vulnerability has another dimension that has been brought to light by LA’s story, as a tale unfolds of those who were unable to renew their insurance cover – at any price – as well as the potential failure of a last-resort government insurance scheme.
Even before Australia’s cost-of-living crisis, a combination of extreme fires and floods has left many households keenly aware of the high cost of home insurance and, in an increasing number of cases, the lack of insurance affordability altogether. Many insurance companies will deny that they have withdrawn from covering specific disaster risks in specific areas but the anecdotal evidence is mounting.
A 2022 Climate Council report highlighted that 4% of homes across the country would be uninsurable by 2030. In the most vulnerable regions, such as Shepparton in Victoria, that figure rose to 90% of properties.
Insurance costs in Australia rose by 28% between March 2022 and September 2024. This rapid rise is due to a combination of factors, including construction costs. And the impact of climate change is key.
We live in a world of insufficient action on global warming. Last year the planet recorded its warmest year yet and hit the unwanted record of 1.55C of warming, the United Nations’ effective line-in-the-sand for temperature rise. Not coincidentally, 2024 was also the third most costly year on record for unnatural disasters, with a price tag of A$230bn in insured losses alone.
There is a clear pattern here of rising global temperatures, rising severity and frequency of disasters, and rising insurance costs. In practical terms, insurers will continue to increase premiums – and not just in high-risk areas – to cover their increasing reinsurance costs and rising claim numbers.
As we are seeing in California, trying to cap premium increases, or asking the public sector to step in, is not a workable solution, at least not on a permanent basis. No rational business will take on that level of risk and government-run schemes will ultimately place enormous pressure on the budget and, ultimately, taxpayers. Yet each time we see premiums jump off the back of yet another disaster, there are loud cries that this is exactly what the insurance sector and government in Australia should do.
Unfortunately, this is a case of shooting the messenger. Indeed, the Productivity Commission has warned that we should not yield to the temptation to try to cover the very real warning signals given by rising insurance premiums. To do so will result in large economic and societal costs.
With the outlook for risk of fire, flood and other disasters increasing, this is not a problem that will go away. So, is there a solution?
First, we need to invest far more in adaptation and resilience. This may be at a community level, through river levees or fire breaks, or at the individual building level, through better design and materials. There is likely to be a strong economic case for government supports for such measures. But in some cases, where risks are too high, relocation may be the only option. Such a step comes with enormous economic and social costs but it is one Australia has already implemented through buy-back schemes.
We also need to plan new urban areas giving greater heed to potential risks. We have built our homes in far too many vulnerable places. We cannot afford to repeat these errors of the past. Governments have committed to providing better data to inform developers and would-be residents and this needs to be done with urgency.
Ultimately, there are no magic bullets when it comes to insurance affordability in a world of rising climate risk and disaster, and a potential drama is likely to unfold in Australia as it has in California. If we fail to take strong action on climate now, that drama will only intensify, for ourselves and our children.
Nicki Hutley is an independent economist and councillor with the Climate Council
