Your house is becoming uninsurable due to climate risks.

Premiums in disaster-prone regions have increased by up to 400%, posing a systemic financial risk. Don’t expect it to be an election issue.

Originally published in Crikey

On the day Treasurer Jim Chalmers delivered his budget, an Austrian insurance executive, Dr. Günther Thallinger, published a short essay on LinkedIn that made a mockery of the government’s long-term plans and projections. The board member at Allianz SE was writing about a fast-approaching and existential financial risk — one that appeared nowhere in the treasurer’s speech and will barely rate a mention in the election campaign.

Thallinger’s succinct warning regards climate-related weather events and the global insurance industry. “Heat and water destroy capital,” he writes. “Flooded homes lose value.” They don’t just lose value, though; houses can become uninsurable. This has far-reaching consequences. “A house that cannot be insured cannot be mortgaged. No bank will issue loans for uninsurable property. Credit markets freeze.”

The insurance industry has historically managed its own disaster-related exposure, but insurers will very soon no longer be able to offer coverage for many of these risks. “The math breaks down: the premiums required exceed what people or companies can pay,” Thallinger writes.

The insurance industry is already shifting its business model in response to this risk by lifting premiums and declaring entire regions uninsurable. Large US home insurers, to ensure their survival, are simply exiting California over its risk of bushfires, and many companies have stopped offering new policies in Florida due to ongoing storm risk. (Five hurricanes in America last year alone caused hundreds of billions of dollars in damage.)

This is only the start of insurers “adapting” as they struggle to cover growing disaster bills. Extreme weather phenomena are driving direct physical risks not just to homes but also to land, roads, power lines, railways, ports and factories globally.

In Australia, the McKell Institute estimated the direct cost of natural disasters could reach $35 billion per year by mid-century, an average of more than $2,500 per household per year. These costs are already rising rapidly: in Australia, every year since 2013 has seen more annual insured losses than the combined losses of between 2000 and 2004.

Insurance premiums are spiking globally, which means non-renewals (people cancelling their insurance) are also increasing. The rate of home insurance non-renewals has risen across the US, at least tripling since 2018 in more than 200 countries. In Australia, home insurance premiums rose an accumulative 56% between 2020-23.

In some cases, according to the Insurance Council of Australia, insurance premiums in disaster-prone regions have increased by up to 400% in recent years. Research from the Actuaries Institute last year showed that nearly one in eight Australian households — 1.25 million people — now pay more than four weeks gross income on home insurance premiums. One in 20 are paying almost two months gross income on home insurance. With vulnerable regions growing inexorably, this situation is set to worsen.

More people exiting the insurance market means more people unable to afford to rebuild their disaster-hit homes: families who ditch their home and contents insurance would lose three-quarters of their wealth if their home was destroyed, according to research by The Australia Institute.

Disaster-hit areas, which are already the most vulnerable, will remain unreconstructed after disasters, not just because of rising building costs but also because insurance and finance are simply not available. The World Economic Forum Global Risk Report 2024 predicts that more than half a million Australian homes will be uninsurable due to extreme weather risks by 2030.

Whole areas in northern Australia and down the east coast (starting with Lismore) are already under irreversible threat as a result. And as temperatures rise and storms spread, the financial risks will mutate and multiply.

“Entire asset classes are degrading in real time,” Thallinger writes, “which translates to loss of value, business interruption, and market devaluation … This is a systemic risk that threatens the very foundation of the financial sector. If insurance is no longer available, other financial services become unavailable too.”

Real estate is the largest investment class of all, but these same pressures apply to infrastructure, transportation, agriculture and industry. Without the ability to price and manage climate risk, basic investments are impossible. “The economic value of entire regions — coastal, arid, wildfire-prone — will begin to vanish from financial ledgers. Markets will reprice, rapidly and brutally. This is what a climate-driven market failure looks like.”

Governments may try to address this disparity between haves and have-nothings, but amid further disasters and adaptation costs, there is a limit to what stretched budgets will cover.

At the terrifying point where enough risk cannot be transferred (no insurance), or absorbed (no state capacity to cover losses), and risk cannot be adapted to (physical limits exceeded), there is existential financial risk. “That means no more mortgages, no new real estate development, no long-term investment, no financial stability,” writes Thallinger. “The financial sector as we know it ceases to function.”

The only escape from this fate is to keep emissions out of the atmosphere, switching from fossil fuels. Somewhat optimistically, Thallinger states, “The only thing missing is speed and scale.” And as if to remind us he’s an insurance executive rather than a climate activist, he adds, “This is not about saving the planet. This is about saving the conditions under which markets, finance, and civilization itself can continue to operate.”

The impacts of climate-driven extreme weather events are already an ongoing item (albeit unspoken) in Australian federal budgets, whether through increased disaster relief or emergency services funding, or the rising cost of adaptation, or rebuilding and insuring infrastructure, or a growing list of other related expenses. However, this liability hasn’t translated into real action to reduce global emissions.

Australia’s domestic emissions have barely budged since 2005, while emissions from its fossil fuel exports, already the third-highest in the world, are set to rise. Even a moderately responsible budget would begin by taxing fossil fuel companies properly and stopping subsidies altogether, using these funds to supercharge mitigation and adaptation measures (including to mitigate against insurance market failures). None of this is even the subject of discussion.

Well, that’s not quite true. A parliamentary select committee was established last year to assess the impact of climate risk on insurance premiums and availability. Driven and led by the Greens and chaired by Senator Mehreen Faruqi, the committee issued its final report in November, 99 pages of which comprehensively discuss many of the threats raised above.

It made eight recommendations, including: a national disaster risk map and database; that insurance companies explain premium costs to policyholders; that the consumer regulator monitors premiums; reformed taxes on insurance; an expanded reinsurance pool for natural disasters and more disaster funds; and a review of planning laws especially on development in high-risk areas.

Finally, it recommended government explore a levy on coal and gas companies to offset insurance costs and fund disaster mitigation measures. Labor and the Coalition, while noting many of the report’s recommendations, both refused to support the key recommendation on the polluter-pays model.

Four months later, Senator Faruqi continues to advocate for this idea. “We know that one-in-two coal and gas companies pay zero tax,” she says. “We need to bring them to the table to pay their fair share, so communities don’t have to pay for how they are damaging the globe.”

She draws attention to the recent budget as a reflection of the Albanese government’s ongoing intransigence on this issue: “It was really telling that the budget overview has an entire section on disaster recovery and rebuild which does not mention climate at all. In fact the whole 64-page budget overview does not mention the word climate.”

Labor’s budget also promised no new money for climate action but more money for fossil fuel subsidies — even while draining the public purse for more disaster relief. With the future of capitalism itself relying on climate mitigation, this is the opposite of responsible financial management.