Insurance in Australia is becoming increasingly unaffordable, which could affect the wider economy as climate change worsens, an Australian actuary told Green Central Banking.
Roughly 3% of bank loan assets are likely to have unaffordable insurance, according to research from Australian analytics firm Finity.
While that might not seem like a lot, it equates to roughly AUS$60bn in loans, said Sharanjit Paddam, an actuary at Finity.
“If those [loans] went under, that would cause a severe crisis for the banking system in Australia,” Paddam said.
Given the significant geographic variation across the country, the risk could be even higher in some areas.
To manage the risk, banks will need to conduct more thorough assessments when making home loans and potentially deny loans for homes that are uninsurable. But doing so could spark a contagion effect as people realise they can’t sell their homes. This in turn, could cause a downward spiral for the banks, Paddam said.
“What it does, in effect, is precipitate the risk, and that’s why many banks are not doing that at the moment in Australia, they’re not doing climate risk assessments and origination, and they’re not checking that people keep up with their home insurance requirements,” he said.
The increasing insurance gap in Australia
The insurance gap is “a severe risk” to Australia, according to Paddam, especially as many small businesses use residential property to secure business loans. This could cause a contraction in capital and lending and “be devastating to our financial system.”
There are no comprehensive statistics on insurance ownership in Australia, so Paddam and other researchers at Finity looked at insurance affordability to determine the impact that climate change is having on the country’s insurance sector. In their latest assessment from 2024, they found that 15% or about 1.6mn households have insurance premiums that would exceed a month of their gross income.
This unaffordability metric has been creeping up over the years that they’ve been calculating it, Paddam said. In 2022, they found 10% of households had unaffordable insurance, which increased to 12% in 2023.
And insurance unaffordability will likely increase as extreme weather events become more common in Australia and the world.
“I would expect some fluctuations up and down year to year… Potentially, we won’t see the same rate of increase… but I think in the long term, increasing emissions will carry on, giving us worse and worse weather, which will carry on leading to higher insurance premiums,” said Paddam.
This trend has created a lot of uncertainty for the insurance sector, especially for reinsurers, he added. While climate change is taking place over a long timeline, pricing for insurance is usually set on an annual basis.
“There’s a lot of volatility, and it can be very hard to discern a climate signal amongst the noise”.
The need for adaptation
Australia, traditionally considered lower risk than the US and Europe, had previously benefited from global reinsurance because it offered a means for insurers to diversify their risk, Paddam said. Providing insurance coverage in Australia and New Zealand, where the risk is uncorrelated to the Northern Hemisphere, also helped reinsurers with capital management.
“But what seems to be happening is that climate change is making things worse everywhere… and so the benefit of that diversification is falling,” he said.
In the long term, this could mean that insurance companies stop underwriting some of the risks from increased extreme weather events. This could, in turn, cause them to reduce their appetite for property risk.
Australia’s mandatory climate disclosures go into effect this year, which Paddam thinks will help surface the impact that climate change is having on the financial system. He thinks mandatory disclosures are needed so people understand the risk.
But the best solution, he says, is to find adaptation solutions, especially for housing. Policymakers and the government can be instrumental in making homes more resilient in Australia by putting in place mechanisms to facilitate it, he said.
For example, there is a need for banks to give out loans for adaptation measures. One way to facilitate this is to issue green adaptation bonds to free up public money for building resiliency in the community, including low-income areas, he added.
“Policymakers need to start to understand that we need a lot of finance in order to solve this problem, but we also need to make sure we’re spending money in the right way and using funds in an efficient way to deal with the problem”.
This page was last updated August 5, 2025
Written by
Moriah Costa is the Editor-in-Chief of Green Central Banking and has over a decade of experience writing about banking and finance. She is an award-winning American journalist based in Paris and has written for major international publications, including Reuters, The Guardian, and S&P Global. Having grown up in water-stressed Arizona, she has always had a strong interest in bringing awareness to climate and environmental issues.
