Underinsurance could pose risks to financial system, report warns
Millions of Australians have opted to underinsure their homes or forego insurance entirely as premiums climb, a policy think tank has found.
Over 800,000 households – home to over 2 million Australians – have not fully insured their homes, research by policy think tank The Australia Institute has found.
Jack Thrower, senior economist at The Australia Institute, warned that many Australians were at risk of financial ruin if their home was hit by a natural disaster, with broader consequences for Australia’s financial system.
“More than two million Australians live in properties without full insurance. Many have mortgages and risk losing almost everything if they’re hit by a flood, fire or storm,” he said.
“Banks in Australia hold over $100 billion in mortgages on inadequately insured properties. Not only does this pose a risk to indebted homeowners, it’s also a risk to the health of the Australian economy.”
In the event of a flood, fire or other natural disaster, underinsured ‘middle Australian’ households faced the prospect of losing three-quarters (74.3 per cent) of their overall wealth, The Australia Institute found.
What’s more, many uninsured home owners still had outstanding mortgage payments, exposing banks to climate risks through their mortgage lending programs.
The average uninsured home owner owed more than $283,000 on their mortgage, while underinsured home owners owed an average of $373,000, The Australia Institute found.
In total, Australians owe almost $119 billion in mortgages on inadequately insured owner-occupied properties, accounting for about 5.4 per cent of all mortgages.
The Australian Banking Association flagged underinsurance as a potential risk to the banking system in a 2023 paper.
“The banking system’s reliance on the insurance sector for [loan default] mitigation is a vulnerability, with rapidly growing premiums in climate-affected areas, and the risk of under-insurance or uninsured collateral.”
It added that default risk metrics were generally calibrated using historical data, which may not be accurate in a future climate change scenario.
“As the severity of impacts continues to change, these historical periods may not capture the full extent of the climate risk on counterparty ratings,” it warned.
The rising frequency of natural disasters directly contributed to rising insurance premiums, insurers have said.
“The frequency and severity of natural disasters have increased in recent years and this is contributing to higher premiums,” the Insurance Council of Australia (ICA) said in a release.
“Insurers have been calling on governments to invest more in resilience and mitigation to protect the many Australians who are living in harm’s way and improve insurance affordability and availability.”
Extreme weather in 2025 had already caused over $1.2 billion in insurance losses, the ICA said in April. This was before it declared yet another insurance catastrophe for the Mid North Coast and Hunter flooding event in May.
Tropical Cyclone Jasper cost insurers $409 million across 10,500 claims in 2023, and the 2022 Eastern floods cost $6.4 billion over 245,000 claims.
Andrew Hall, chief executive of the ICA, said that over 200,000 homes in Australia had a 2 to 5 per cent chance of flooding every year, an above-average figure for a developed country.
"To normalise flood insurance for people in high-risk flood zones, we're going to need to find a way to spread that cost across the community more broadly. And it's a difficult discussion to have," he told ABC Radio National Breakfast in the aftermath of March’s ex-tropical Cyclone Alfred.
Natural disasters have cost the federal budget $1.6 billion a year, a paper by the Centre for Policy Development has found. The government only officially budgets for $215 million in disaster recovery annually, creating a funding gap of $6 billion over the forward estimates.
The Australia Institute called on the government to consider ending fossil fuel subsidies and investing more in climate mitigation and damage control.
“Australia continues to pour fuel on the fire by spending billions on fossil fuel subsidies, expanding fossil fuel extraction,” Thrower said.
“A tax on the companies extracting and selling Australia’s fossil fuel resources could be used to set up a National Climate Disaster Fund, which would help the growing number of Australians at risk of losing their homes in a natural disaster.”
