‘Home insurance affordability and socioeconomic equity in a changing climate’ unpacked

After a whirlwind week of media coverage, the Actuaries Institute hosted a Virtual Insights session discussing the newly published Green Paper, Home insurance affordability and socioeconomic equity in a changing climate.  

The session, held on Monday 22 August, featured authors and climate experts Sharanjit Paddam, Calise Liu and Saroop Philip from Finity Consulting.

The paper, which has been featured in ABC News and Insurance News among other media outlets, takes a deep dive into the intersection of climate risk and socioeconomic vulnerability by comparing the insurance costs for each Australian household with household income under a range of climate scenarios.

Sharanjit Paddam and Calise Liu joined the Actuaries Institute podcast to discuss the key points of the Green Paper. Click here to listen.

This forms the Australian Actuaries Home Insurance Affordability (AAHIA) Index, which is the ratio of the annual home insurance premium to the annual household income gross of tax. The premium considers the natural perils risk specific to the property’s location by using Finity’s natural perils models, as well as the level of retail home insurance premiums across the Australian market.

The annual household income is modelled at an individual household level using Finity’s demographic and socioeconomic dataset Defin’d. The index, therefore, indicates how many weeks of gross income a household would need to spend on their annual home insurance premium.

 

The AAHIA finds that one million Australian homes are facing insurance premiums of more than four weeks of gross income today. These households are defined as vulnerable and are primarily concentrated in northern Queensland, the Northern Territory and northern New South Wales. They are also more likely to be single adult households (including single parents), have low insurance literacy and low savings. The median AAHIA is 7.4 weeks for vulnerable households, compared to 1.0 weeks for base (non-vulnerable) households.

To understand how this will be affected by climate change, the Green Paper also projects home insurance premiums at 2050 under a low and high emissions climate scenario (RCP 2.6 and RCP 8.5).

It finds that under a scenario where global warming remains below 2°C by 2050 and all other factors remain constant, median AAHIA in 2050 will increase by 0.2 days for base households, but 7.6 days (14%) for vulnerable households.

Under a scenario with continued high emissions, where global temperatures rise by approximately 3°C by 2100, the median AAHIA in 2050 will increase by 0.4 days for base households, but 10.7 days (20%) for vulnerable households. This is driven by increases in cyclone, bushfire and flood costs. These differences between the base and vulnerable populations show that climate change is not going to have a uniform impact across Australia.

The paper also discusses potential solutions to these dual pressures of increasing climate risk and existing socioeconomic vulnerability. These include immediate solutions such as replacing state-based levies and stamp duty on insurance with more equitable and efficient revenue sources, and considering direct subsidies for resilience measures for vulnerable households. They also include long-term solutions that require the collaboration of the financial sector, builders and developers, all levels of government and First Nations Australians.

The presentation led to many questions from the audience, including whether vulnerable households would in fact be uninsured.

While data on uninsured households is not available and therefore not explicitly included in the research, the definition of vulnerable households was intended to proxy those households that cannot afford partial or full insurance coverage due to affordability pressures. The Australian Competition and Consumer Commission’s findings that 11% of households in Australia do not purchase insurance was used to inform the definition of vulnerability, as were other metrics of financial stress from socioeconomic research.

Another question that was raised was whether insurers ability to price at a risk location has contributed to the affordability pressures as much as climate change. This raises questions about what equity means and what the appropriate level of risk pooling or community rating is. Sharanjit Paddam noted that while equity can be seen through a variety of lenses, the competitive nature of the Australian insurance market drives insurers towards risk-based pricing.

“I don’t actually think that (community rating) is the solution… the fact is that for 90% of Australians, insurance is an affordable, well-working product. A big systemic solution across the market because of that 10% of unaffordability would not be effective or efficient. We should leave that 90% to the market, and then intervene on that 10%.”

Missed the session? Watch the recording and view the presentation slides.

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