Insurance coverage disparities in Australia pose a threat to the financial system, according to an actuary's analysis.

In Australia, the unaffordability of insurance premiums has emerged as a significant concern, with 15% or approximately 1.6 million households having insurance premiums that would exceed a month of their gross income. This issue, if left unaddressed, could potentially cause a severe crisis for the banking system in Australia, as unaffordable insurance loans going under could impact around 3% of bank loan assets, equating to roughly AUS$60 billion in loans.

Climate change is exacerbating the problem, making risks worse everywhere and decreasing the benefit of diversification through global reinsurance. Insurance companies are increasingly reducing their appetite for property risk due to climate change, and some may even stop underwriting certain risks from increased extreme weather events. This trend is particularly prominent in certain geographic areas of Australia, where the risk of unaffordable insurance could be higher.

The unaffordability of insurance is expected to increase as extreme weather events become more common in Australia and the world. Researchers at Finity have found that the unaffordability of insurance will likely continue to increase in the long term due to increasing emissions leading to worse and worse weather, resulting in higher insurance premiums.

To address this issue, policymakers and the government are exploring various solutions. Mandatory climate disclosures, set to go into effect this year, are intended to help surface the impact of climate change on the financial system. Banks will need to conduct more thorough assessments when making home loans to manage the risk, potentially denying loans for homes that are uninsurable.

One potential solution is the issuance of Green Adaptation Bonds to free up public money for building resiliency in the community, including low-income areas. The Australian Treasury and the Australian Department of Climate Change have discussed plans for such bonds to finance climate adaptation measures for housing.

Policymakers also need to ensure efficient use of funds to deal with the problem of climate change. Facilitating adaptation measures through loans for such measures can help mitigate the impact of unaffordable insurance premiums on small businesses that use residential property to secure business loans, making their financial stability a potential concern.

This article was last updated on August 5, 2025. It is crucial that policymakers and the government continue to address this issue proactively to ensure the stability of the banking system and the financial security of households and businesses in Australia.