APRA warns climate risks could leave 1 in 4 homes uninsured

The regulator assessed two severe scenarios covering weather losses and transition costs through to 2050.

The Australian Prudential Regulation Authority (APRA) has released a stress test indicating that climate change could significantly reduce home insurance affordability and coverage by 2050. 

The assessment examined two severe scenarios: one focused on high physical risks from weather and another on the economic costs of transitioning to a lower-emissions economy.

Currently, one in seven Australian homes is uninsured. APRA predicts this could rise to one in four by 2050 under both scenarios, leaving an additional one million homes without adequate cover. 

Regional and rural areas are expected to be the most affected, with the insurance protection gap potentially exceeding 40% in these communities.

The primary drivers of higher premiums vary by scenario. In a high physical risk environment, annual weather-related losses could rise from $7b today to over $16b by 2050. 

In the transition risk scenario, rising construction costs become a major factor in pushing premiums up.

APRA Member Suzanne Smith noted that a widening protection gap shifts financial losses from insurers to households, banks, and the government, potentially weakening the national financial system. 

To mitigate these risks, the regulator called for stakeholders to focus on emissions mitigation and physical adaptations, such as building protective infrastructure and retrofitting homes.