When one home insurer after another says you'll have to pay premiums you can't afford because your house is at risk of flooding, it can seem like an existential threat. Without insurance, regaining your economic security would be a very long haul. 

It's a predicament affecting many. A report released by the Australia Institute in May this year revealed that 533,229 homes in Australia were underinsured, and 344,523 were not insured at all. In around half of these cases, it was because the homeowners couldn't afford the premiums. 

The average uninsured homeowner owed more than $283,000 on their mortgage, while underinsured homeowners owed more than $373,000, according to the research. 

"If their home was lost or badly damaged, they could find themselves staring at homelessness or bankruptcy," the report warns.  

It's a bleak prospect, but how accurate are the risk ratings that are making home insurance so costly? CHOICE has heard from a number of homeowners who've been all but priced out of the market after their properties were deemed a flood risk. Yet in many cases these people say they don't live in a high risk area, as confirmed by their local councils. 

The NFID is a patchwork of information, rather than a single source of truth

In its submission to the Parliamentary Inquiry into the insurance industry's response to major flooding around Australia in 2022, the Insurance Council of Australia (ICA) estimated that around 675,000 (4.4%) of properties face a greater than one percent risk of flood each year. This boils down to a one-in-100-year flood risk. 

The data came from the National Flood Information Database (NFID), which holds around 13.7 million property addresses. It's owned by the risk assessment firm Risk Frontiers and is commissioned by the ICA for use as a proprietary tool by most insurers in Australia. 

It's what they use to rate flood risk, based on studies and mapping contributed by local, state and territory governments. They pay the ICA to access this information.   

But the data on flood risk is only as up to date as the most recent council studies, many of which go back to 2018, and not all flood studies are shared with Risk Frontiers. And because the ICA didn't create and doesn't own the original flood risk information, the NFID generally only contains details of the studies, not the complete reports. It's a patchwork of information, rather than a single source of truth.

No access to fair prices 

A greater than one percent flood risk would seem like a remote risk, but, as the parliamentary report puts it, "For many property owners whose properties are exposed to a one per cent or greater flood risk, they are not able to access insurance for flood at actuarially fair prices".

CHOICE recently reported the case of a homeowner in the Illawarra area of greater Sydney whose local council told him his home was not at significant risk of flood. But his premiums had nevertheless increased to the point of unaffordability, and other insurers were giving similarly high quotes. 

15% of Australian households – about 1.6 million – were experiencing home insurance affordability stress as of March 2024

An insurance broker told him it didn't matter what the council said; the area he lived in was flagged as a flood risk on the NFID. He was looking at not being able to afford to protect the biggest financial asset his family had.  

It is far from an isolated case. In 2023, we reported that nine out of ten Australian households had seen their home insurance premiums increase. For some homeowners, the increases were extreme. 

According to the Actuaries Institute, 15% of Australian households – about 1.6 million – were experiencing home insurance affordability stress as of March 2024, which it defines as annual premiums exceeding four weeks of gross household income. 

Australia is an outlier compared to countries such as the UK, the US and Netherlands, where flood risk information is accessible to both insurers and homeowners.

'We need a market that works for everyone' 

Tyrone Shandiman, Chair of the advocacy group the Australian Consumers Insurance Lobby (ACIL), tells CHOICE that the market has ceased to function as intended for many people. 

ACIL is made up of consumer advocates as well as insurance professionals. Shandiman is a broker who sees homeowners being priced out of the market firsthand. 

"The market works for a majority of people, but there are outliers that just cannot afford insurance or in some cases even get it, and that's not acceptable," Shandiman says. "We need a market that works for everyone. Insurance is an essential service." 

Shandiman acknowledges that the tools insurers use to measure risk are never perfect, but the NFID's shortcomings can lead to unfair outcomes.  

The market works for a majority of people, but there are outliers that just cannot afford insurance or in some cases even get it, and that's not acceptable

ACIL chair Tyrone Shandiman

"I've seen cases where the corner of the property that does not have a building on it is deemed to be in a flood zone, but the part where the house actually stands is not. It's so far up the hill that it's a completely different risk. Yet all of a sudden the homeowner is facing excessive premiums due to flood risk. There's a very cut and dry approach taken by insurers. They just follow what the database says. It's very hard to have an insurer reassess a premium when their system says there's a flood risk." 

Speaking hypothetically, Shandiman suggests that an arrangement in which all insurers gauge flood risk through a proprietary database owned by the ICA would seem to meet the definition of cartel conduct. 

"When insurers' pricing and underwriting practices all draw from the database, there's no variation in how insurers assess floods. And that means there's less competition in the market. How is that legal? It's convenient for insurers to have this information, but it brings about some problems for consumers when they're all using the same database to work out the risk of a particular address."

Businesses must compete

When we asked the Australian Competition and Consumer Commission about this in general terms (the ACCC won't comment on specific cases), a spokesperson told us that businesses "must make decisions about pricing independently, rather than in consultation or through co-operation with competitors. Competing businesses risk contravening the Competition and Consumer Act if they reach arrangements or understandings between themselves about how they will set their prices, instead of competing."

The only way to reduce premiums over the long term is to reduce risk through greater investment in mitigation projects like levees, dams, home raising, and buybacks where appropriate

ICA spokesperson

The ICA didn't respond to our questions about whether insurers all using the same flood risk information could be considered non-competitive, but a spokesperson told us flood studies "can be costly and complex exercises that often take years to complete, so an older study isn't necessarily inaccurate or out of date". 

"The only way to reduce premiums over the long term is to reduce risk through greater investment in mitigation projects like levees, dams, home raising and buybacks where appropriate," the spokesperson said, adding that the ICA "is in ongoing conversation with all levels of government about the need for mitigation and continues to advocate against developments on floodplains".

Several factors are leading to rising premiums, including climate change and the resulting weather events, the cost of reinsurance for insurers, and the increasing costs of rebuilding.

More transparency needed 

For Daniel Melser, a senior research fellow at Monash University, transparency is the missing element in how home insurance premiums are determined. 

Melser pointed out in a recent article that making the NFID available to insurers but not homeowners makes Australia an outlier compared to countries such as the UK, the US and Netherlands, where flood risk information is accessible to both parties.

In the US, the federal government subsidises flood insurance for homeowners who can't afford it through its National Flood Insurance Program and also bails out insurance companies faced with an unsustainable number of flood claims. No such system exists in Australia. 

A further complication is that the data in the NFID only gives a partial picture.

"It can help identify where flood studies have been done, but doesn't offer consistent, property-level flood risk data," Melser writes.

Insurers also use other risk-rating tools that its customers are not privy to. In a recent ruling by the Australian Financial Complaints Authority, a homeowner's complaint about a 60% premium increase by Honey Insurance (underwritten by RACQ) was knocked back on the grounds that its new geocoding software had detected higher risks. 

Currently households have limited information about what is driving their insurance premium

Daniel Melser, Monash University

Several factors are leading to rising premiums, including climate change and the resulting weather events, the cost of reinsurance for insurers, and the increasing costs of rebuilding, Melser says. But the explanations homeowners receive for price hikes often lack specificity. 

"Currently households have limited information about what is driving their insurance premium," Melser tells CHOICE. "This should change. More transparent pricing by insurers will make clear to households what is driving their bill and why."

And transparency can lead to a greater focus on reducing exposure to risk, not only through government-funded flood barriers and other infrastructure but also through building more weather-resistant homes. 

"Part of the tardiness in reducing overall risk levels is because we don't currently have transparency around the benefit of these investments through pricing transparency," Melser says. 

"We need to build a virtuous cycle of having visibility of insurance pricing, undertaking investments to reduce risk at the regional or property level, and then seeing the insurance premiums decline as a result of these investments. The first step in this process is around pricing transparency."

The way it works now, the insurance industry is playing a lead role in managing flood risk information. And transparency about its accuracy or how it's used to determine premiums does not seem to be on the cards.

Stock images: Getty, unless otherwise stated.

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