The outlook for house insurance is much worse than we're being told

The big news on house insurance this week was the response of the insurance industry’s peak body to a parliamentary committee’s extensive criticisms of its treatment of people claiming on their policies after the massive floods of 2022.

The Insurance Council of Australia accepted some of the committee’s recommendations, announced an “industry action plan” and generally promised to be good boys in future. But the consumer groups were unimpressed.

Drew MacRae, of the Financial Rights Legal Centre, said the insurers “have a long way to go to restore trust and confidence in a sector that systematically failed customers during the 2022 floods. Today’s announced plan to get there is welcomed, but ‘trust us’ just won’t cut it.”

Meanwhile, in their pre-election campaigning, Anthony Albanese and Peter Dutton are as one in portraying our insurance problem as a matter of misbehaving insurance companies.

Asked if he accepted a journalist’s claim that the companies had doubled premiums in recent years, “had plenty of money” and “are ripping us off”, Albanese flatly agreed. “We will certainly hold the insurance companies to account,” he added.

Dutton’s response was to threaten to split up the big insurance companies – until wiser heads in his team calmed him down.

Sorry, all this is delusional for some and, for others, a knowing attempt to mislead us on the seriousness of the problem. Have the insurance companies been behaving badly? Yes. Should they be forced to treat their customers fairly? Of course.

But will that fix the problem? No. Have the companies been ripping us off, putting up premiums just to increase their profits? No. They’ve been grappling with a problem they know they can’t solve: you can’t insure against climate change.

The cost of house insurance has been rising rapidly for several years because more bushfires, cyclones, storms and floods have led to more claims. We know that continuing climate change will cause extreme weather events to become more frequent and intense.

So the great likelihood is that house insurance premiums will just keep rising rapidly. The outfit that’s doing most to alert us to the deep trouble we have with insurance is the climate campaigning Australia Institute. Its recent national poll of 2000 people found that while 78 per cent of home owners said their home was fully insured, 15 per cent said they were underinsured and 4 per cent said they were uninsured.

As house insurance premiums rise, more people will become underinsured – many with no insurance against flood damage, for instance – and more will be uninsured. Many of the latter will be people whose homes the companies have refused to insure.

The insurance companies know what’s coming, as do the banks and the government. They know what’s coming, but they don’t want to talk about it before it happens, mainly because they don’t know what to do about it.

Remember, insurance is an annual contract. So if I’m confident there’s little chance of your house being destroyed in the next 12 months, I’m happy to give you the assurance of insurance. But when, sometime in the future, I decide you’re a bigger risk, it will be a different story.

The point is, there’s no magic in insurance. It can do the possible, but not the impossible. The way insurance works is that, if I can gather a “pool” of many thousands of home owners, each with only the tiniest risk of having their house burn down, I can promise all of them that, in return for a modest premium, they’re all fully covered in the event of a major mishap.

A few of them will have such a mishap, but I can pay them out from the pool of premiums and still have enough left to make it worth my while being in the insurance business.

Once the risk of your home coming to grief becomes less than tiny, however, the game changes. When more than a few people in the pool make claims, I make no profit, or maybe a loss. So I can start by making owners with bigger risks pay more than those with low risks, but once your risk is too high, I can either charge you a premium that’s impossibly high, or just refuse you insurance.

Because of their ever-growing record of claims, the insurance companies are well-placed to make a reasonably accurate assessment of how risky it is to cover your house – even to the point of charging more in some parts of a suburb than others.

This means, of course, that home owners in some parts of the country will be charged far more than others. Premiums will be highest in northern Australia, where cyclone risk is higher, but also in areas where flooding or bushfires are likely. And even people living well away from harm in the inner city will be paying more to help out.

All this is why we should be doing more – and have been doing more this long time – as our part in the global effort to limit climate change. But what should we do to reduce the damage that’s arrived or is on its way?

Well, certainly not having the government subsidise insurance. That would just encourage people to keep doing what they should stop doing. Taxpayers’ money should be used only to help people get away from the risk of fires and floods.

Just as fighting a fire is easier than fighting a flood, bushfires are less difficult to get away from than floods. We must start by preventing anyone else building in risky areas.

Then we need to move people off the flood plain. As for Lismore, the whole town needs to be moved to higher ground.

But here’s a tip. Don’t hold your breath waiting for Albanese or Dutton to raise these issues in the election campaign. That’s not the way losers behave. Much easier to shift the blame to the greedy insurance companies.

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How many more cyclones before our leaders finally do something?

Forgive me for being hard-headed while everyone’s feeling concerned and sympathetic towards those poor flooded Queenslanders and people on NSW’s northern rivers, but now’s the time to resolve to do something about it.

As the rain eases, the rivers go down, the prime minister flies back to Canberra and the TV news tires of showing us one more rooftop in a sea of rushing water, the temptation is to leave the locals to their days and even months of getting things back to normal, while we go back to feeling sorry for ourselves over the cost of living and waiting impatiently until the federal election is out of the way, and we stop hearing the politicians’ endless bickering.

But speaking of politics, let’s start with Anthony Albanese. He’s been forced to abandon his plan for an April 12 election because calling an election in the middle of a cyclone would have been a very bad look.

“I have no intention of doing anything that distracts from what we need to do,” he told the ABC. “This is not a time for looking at politics. My sole focus is not calling an election, my sole focus is on the needs of Australians – that is my sole focus.”

Ah, what a nice bloke Albo is. Convinced? I’m not. You don’t get to be as successful a politician as Albanese unless your sole focus is, always and everywhere, politics. It’s because his sole focus is politics that he knows now’s not the time to look political. “Election? Election? If I don’t make out I don’t care about the election at a time like this – I could lose it.”

One thing I’ve learnt from watching prime ministers is that, though they all make mistakes – buying a holiday beach house during a cost-of-living crisis, for instance – they never make the same mistake that helped bring down their predecessor.

Every pollie knows Scott “I don’t hold a hose” Morrison’s greatest mistake was to persist with his Hawaii holiday during the Black Summer bushfires of 2019-20. The ABC has helpfully dug up footage of people in the affected area refusing to shake Morrison’s hand after he turned up late.

Now do you get why Albanese’s been doing so much glad-handing up in the cyclone area?

The election campaign that’s already begun is between two uninspiring men, neither of whom seem to have anything much they want to get on and do. You’re going to fix bulk-billing, are you? Wow. Anything else?

But, perhaps in an unguarded moment, Albanese did say something impressive. He seemed to elevate climate change as a major election issue, saying all leaders must take decisive action to respond to global warming because it is making natural disasters such Cyclone Alfred worse and more expensive to recover from.

Actually, this is the perfect opportunity to make this an election worth caring about. You’ve got a Labor Party that cares about climate change but is hastening slowly, versus a Liberal Party that only pretends to care and whose latest excuse for doing nothing is switching to nuclear power. This would take only a decade or two to organise so, meanwhile, we can give up on renewable energy and abandon Labor’s commitment to cut emissions by (an inadequate) 43 per cent by 2030.

Both sides are likely to lose more votes to the two groups that do care about climate change – the Greens and the teal independents. Labor is delaying announcing its reduction target for 2035 until after the election. If Albanese had the courage, he’d promise a much more ambitious target and make it a central issue in the election.

The point is, Alfred is hardly the last cyclone we’ll see. Extreme weather events – including heatwaves, droughts and floods - have become more frequent and more intense. How many more of them will it take to convince us we need to do more to reduce our own emissions, as well as taking responsibility for the emissions from the coal and gas we export to other countries?

What’s different about Alfred is it hit land much further down the coast than usual. Reckon that’s the last time this will happen? Modelling by scientists at UNSW’s Climate Change Research Centre suggests that weakening currents may lead to wetter summers in northern Australia.

Other researchers from the centre tell us “our climate has changed dramatically over the past 20 years. More rapid melting of the ice sheets will accelerate further disruption of the climate system.”

A big part of our problem is the longstanding human practice of building towns near a good source of water, such as a river. Rebecca McNaught, of Sydney University, tells us Lismore is one of the most flood-prone urban centres in Australia.

Dr Margaret Cook, of Griffith University’s Australian Rivers Institute, reminds us that, until recently, 97 per cent of our disaster funding was spent on recovery, compared with 3 per cent invested in mitigating risk and building resilience.

That’s all wrong and must be reversed. Armies of volunteers – plus defence forces – emerge after disasters to help mop up. But Cook argues for an advance party that arrives before a disaster to help prepare by moving possessions, cleaning gutters and drains and pruning trees.

She advocates advanced evacuation, permanently relocating flood-prone residents, raising homes and rezoning to prevent further development in flood-prone areas.

“We must improve stormwater management, adopt new building designs and materials, and educate the public about coping with floods,” she says.

As we saw at the weekend, the defence forces have become a key part of the response to natural disasters. Great. Except that, according to a review in 2023, the Australian Defence Force is not structured or equipped to act as a domestic disaster recovery agency in any sustainable way.

It could be so structured, of course, though it might take a bob or two. And that’s before you get to the problem of houses that are uninsurable and insurance policies that are merely unaffordable.

The more you think about climate change, the more you realise it’s going to cost taxpayers a bundle.

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