Insurance is a way to manage risk by pooling resources to protect against financial loss. The risk is shared among policyholders, making large losses more manageable.

Individuals or organisations enter into an agreement (insurance policy) to pay premiums to an insurer. When the individual or organisation suffers a loss through unexpected circumstances, the insurer provides compensation for specified losses or damage.

The insurer uses statistical analysis to predict risks and set premiums accordingly, ensuring that claims can be covered.

Insurance is only designed to cover events that are sufficiently rare, rapid and random (i.e. not slow moving, gradual and known events like sea-level rise).

Traditionally, insurance served as a societal safety net, distributing various risks across society. In the context of climate change, insurance also has social and political dimensions that can be used to modify behaviour of individuals and the wider community that can support or undermine adaptation through how it influences vulnerability.

In brief, insurance cover for extreme events:

• can help to shift financial risk from households and businesses to financial markets
• may provide incentives to encourage actions to better prepare for extreme events
• may help to finance recovery from an extreme events
• can – when it works effectively through rapid payouts and prompt assistance – help to reduce disaster impacts especially on more vulnerable populations.

How risk is transferred can also promote undesirable behaviour. For example, if government takes over or covers the risk, then there may be less incentive to mitigate the risk or take out private insurance.

Insurance companies operating in Australia vary in their coverage of extreme events at the coast for their residential building property insurance (called here ‘house insurance policies’: note that this discussion does not include house contents’).

Broadly, Australian house insurance policies all recognise (but do not cover) 'actions of the sea', including gradual sea-level rise, storm surge and erosion. Some now also consider king tides. Each of these impacts differ in their potential to cause property damage.

• Sea-level rise as a single factor can cause inundation of properties during high or king tides in low-lying areas, e.g. estuary shorelines.
• Storm surge driven by intense storms such as cyclones and East Coast Lows (that will be exacerbated as sea levels continue to rise and the intensity of storms changes) can inundate buildings causing damage to structures and content.
• Erosion, caused by storm surge and sea-level rise, can remove land on the property and cause damage to buildings or undermine foundations to cause collapse.
• King tides are the highest tides and can cause minor (temporary) flooding of low-lying areas: they can exacerbate flooding in urban areas if they coincide with storm events to hamper stormwater draining away.

The Actuaries Institute reported:

• in 2022 that about 1 million ‘vulnerable’ households spend an average of 7.4 weeks of their gross annual income on home insurance
• by 2023 report, this had worsened, with 12% of households being “affordability stressed,” spending 8.8 weeks of gross annual income on insurance.

The Actuaries Institute describes these vulnerable households as older, renting, have less savings and are located in lower socioeconomic areas. For these households, high premiums make it harder to invest in risk reduction and in recovery from extreme events.

Insurance costs in coastal areas have long been predicted to rise due to increasing intensity and frequency of extreme events (HoR SCCCWEA 2009, Chapter 4).

Australian household insurance bills (house, contents and vehicles) have risen by 10% from 2002 to 2024 (see figure below). By 2025, in some high risk areas, premiums have risen by up to 30% due to extreme weather events and reinsurance costs.

High insurance premiums can exacerbate underinsurance, where homes are not sufficiently insured or go uninsured.

Underinsurance is when a homeowner’s insurance coverage does not cover the full cost of a loss or claim, leaving home owners with insufficient funds to rebuild and furnish their property after an extreme event. This is a problem for households and their ability to recover, but it also has wider implications for governments and the need to support devastated communities.

Home underinsurance in Australia is already a significant (and increasing) problem for individuals and governments. Approximately 23% of Australian households do not have building or contents insurance. This is likely to worsen with high costs of living already pinching household budgets, plus the cost of house insurance is likely to increase with any perceived or real increase in risk in the coastal zone.

Underinsurance of homes in Australia has become more visible following recent disastrous fire and flood where many homes across many localities or regions were damaged beyond repair. Homeowners that considered themselves to ‘have insurance’, found they did not have sufficient insurance to rebuild their houses and replace contents to a similar standard.

Homeowners tend to underinsure because they:

• underestimate the complex and increasing costs of rebuilding a house and replacing contents
• may intentionally opt for a lower coverage amount to reduce their insurance premiums
• may not trust insurers to pay out post-disaster.

The problem of no or underinsurance can have broad and long term consequences. For example, it can deepen financial inequality for individuals and families affected by an extreme event.

Increasing risks of inundation or storm damage in the coastal zone, means insurers may increase premiums or stop offering policies to cover those risks.

In 2022, the Climate Council report Uninsurable Nation (Hutley et al. 2022) predicted that by 2030:

• one in 25 (or 3.6% or 520,940) properties will be ‘high risk’ and uninsurable
• one in 11 (9%) properties ‘medium risk’ and potentially underinsured: their annual damage cost is approximately 0.2-1% of the property replacement cost.