Updated ,first published
The number of homes without adequate insurance could rise by 1 million by 2050 because climate change threatens to force higher insurance premiums and make cover unaffordable for more households, the financial regulator has found.
The Australian Prudential Regulation Authority (APRA) on Tuesday released the results of its climate “stress test” for the insurance industry, which explored how climate change could worsen affordability.
The stress test, which involved working through scenarios with the country’s five biggest insurance companies, found the proportion of households lacking adequate insurance could rise from about one in seven today, to one in four by 2050.
Under one scenario of worsening climate change, APRA found expected annual losses from weather-related events could rise from about $7 billion today to more than $16 billion by 2050.
APRA said that regional and rural communities would be disproportionately affected, and the rate of insurance would widen more in regions where already there were low levels of insurance protection.
The report said that if more people were inadequately covered, it could increase uninsured losses for households, increase credit risk for banks and constrain growth in the home insurance market. “Over time, these pressures could erode the resilience of Australia’s financial system,” APRA said.
Australian banks in regions with higher risks of natural disasters would face growing credit risks, APRA said, as borrowers who were underinsured would be more likely to default if they faced a major financial hit from a severe disaster.
APRA emphasised that its findings were not forecasts or predictions, but an assessment of how the financial system may be affected by “severe but plausible stress conditions”.
The stress test looked at two scenarios – one in which carbon emissions continued to rise, leading to more climate impacts, and a second scenario in which there is rapid global action to lower greenhouse gas emissions after 2030.
APRA said that in the first scenario, the higher risk of natural disasters pushed insurers’ costs up, which fed into higher premiums. In the second scenario of rapid action to curb global warming, APRA said there was a bigger rise in construction costs, which also fed into higher premiums.
The cost of Australian home insurance jumped by an average of 7.2 per cent a year from 2010 to 2025, APRA said.
Key reasons for the surge were more frequent and severe wild weather, rising construction costs and higher costs from reinsurance (when local insurance companies offload some of their risk onto global players in the insurance market).
While APRA did not project future movements in premiums, it estimated growth in the country’s “protection gap” – the extent to which losses are not covered by insurance. The stress test concluded that about 40,000 households a year would lose their insurance cover because of affordability problems, which would mean an extra 1 million households could be without insurance by 2050.
The Insurance Council of Australia said APRA’s findings underlined the need for more public investment in disaster resilience. It has previously called for the federal and east coast state governments to invest more than $30 billion in protecting homes from flood risk through infrastructure such as dams and levees.
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Clancy Yeates is deputy business editor. He has covered banking and financial services, and was previously national business correspondent in the Canberra bureau.Connect via X or email.