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New research finds home insurance harder to come by in a time of climate change

5 June 2014

Homebuyers are being warned that extreme weather risk combined climate events could double the price of a home insurance premium and erode property values in some areas by up to 40 per cent within the term of a mortgage, according to new research commissioned by The Climate Institute in partnership with consumer group CHOICE.   

“This report warns homebuyers that they need to consider extreme weather risk and climate change very seriously. In high-risk locations, some home insurance policies are already unaffordable and there are insurers who won’t even offer policies at all,” said John Connor, CEO of The Climate Institute.

“This report finds that climate and extreme weather impacts add to Australians’ cost of living, with homeowners and buyers often unwittingly caught between failures by governments and the marketplace to reveal information about the current risks and how they are projected to worsen.”

“It is increasingly important for consumers to factor in weather risk before purchasing a home, because if you buy in a high-risk area without knowing it, you may find that you are unable to afford insurance,” said CHOICE CEO, Alan Kirkland.

“If you already own in a high-risk area, you need to be careful about the risks of underinsurance—otherwise, you may find that your insurance payout is not enough to allow you to rebuild after a major event.

“The good news is that this report provides some tips on how to assess the level of risk of a property you own or are considering buying.

“We think that the insurance industry can do more to inform home owners about climate risk and how it impacts on premiums.”

Buyer Beware: Home Insurance, Extreme Weather and Climate Change was  prepared by independent analysts Climate Risk. It was done by surveying insurance policy prices and availability around Australia and applying current climate change projections to forecast future policy costs.

Insurance firms are some of the best risk analysts and, in stark contrast to other—such as many superannuation funds and governments —many already account for climate change impacts.

“One serious problem is that most homebuyers won’t even know that they are buying a high risk home, so it is very much a ‘buyer beware’ property market. No insurer is going to say, ‘Don’t buy there!”, but there are ways to work out the problem areas. So with this report we’re providing tools that homebuyers can use to uncover insurability risks,” said Dr Karl Mallon, lead report author at Climate Risk.

Key findings of Buyer Beware include:
  • The cost of premiums in high weather-risk locations is up to 10 times that of a typical policy at locations at lower risk. The highest risk locations are in Northern Australia and in the middle of some of our largest cities.
  • In half of the tested locations considered high-risk, at least one insurer—including some of the country’s biggest firms—declined to make online quotes available at all.
  • Underinsured homeowners who suffer a major loss may receive payouts amounting to as little as half the sum required to replace their home, because new homes will have to be built to much higher standards to withstand extreme weather.
  • Many insurance policies do not cover for local extreme weather risks such as coastal inundation, erosion, land-slip, and foundation damage. Yet these are some of the impacts that climate change is making worse.
  • Based on the high-end of climate projections, an average home insurance premium could rise by 92 per cent over the life of a standard 30-year mortgage; while the impact of climate change on insurability could lead to property value reductions of 20 to 40 per cent over the life of a standard 30-year mortgage.
Connor said: “The rising cost of insurance isn’t a problem just for homeowners and buyers, but rather it lumbers the whole community with a bigger financial burden, with government often seen as the insurer-of-last-resort. Ultimately, it’s taxpayers—everyday Australians—who foot the bill when big, costly market failures like this are ignored.”

Following the 2011 floods in Queensland taxpayers were levied an estimated $1.8 billion to help make up the estimated $5.8 billion needed for relief and reconstruction.

A March 2014 report on climate impacts and vulnerability by the Intergovernmental Panel on Climate Change said that, in some cases, the lessons of past extreme weather events have not been learnt, with governments often still doing little or nothing to discourage settlement in hazardous areas, exposing homeowners and homebuyers to unnecessary risk.

“Australia is a land of floods and fires, but this hasn’t prevented all tiers of government from allowing the development of many, many vulnerable homes in locations known to be at risk from floods, bushfires, severe storms, erosion, drought, and seawater inundation. And unwitting homebuyers become the ultimate victim of this negligence,” Connor said.   

According to the Bureau of Meteorology and CSIRO, the frequency and severity of bushfire, heat waves, and drought is climbing. Sea levels are rising, and climate projections show a likely rise in more severe floods and storm surges, and possibly more intense tropical cyclones.

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