Australia faces some of the world’s highest climate losses
New data from the Insurance Council of Australia (ICA) shows that every decade since 1980 has brought higher inflation-adjusted losses from floods, bushfires, storms and extreme cold. When compared with five other developed nations over the last five decades, Australia ranks near the top for per capita losses from natural catastrophes. The drive behind these rising costs is multifaceted: climate change is increasing the severity and frequency of disasters, populations are growing in harm’s way, and infrastructure often isn’t built to withstand a shifting climate.
In the most recent five-year period, insured extreme-weather losses in Australia totalled about $22.5 billion, a 67% jump from the prior five years. While this reflects greater exposure, it also underscores an urgent need for resilience and smarter risk transfer mechanisms to ensure communities are protected as costs escalate.
Resilience and reform: investing in a durable future
Industry figures argue that the only sustainable way forward blends stronger resilience with smarter financial tools. “Projects like flood levees,” as one expert notes, “home strengthening against cyclone and bushfire risk,” and building new homes to withstand future climates are material steps toward reducing the losses that insurance must cover. Governments, too, are being urged to scale resilience investments that protect property and lives, complementing traditional risk transfer with public infrastructure improvements.
The protection gap and the cost of inaction
Despite these efforts, a growing protection gap means many people and businesses cannot access affordable insurance or any coverage at all. In Australia, 77% of properties at extreme flood risk do not have coverage, with premiums in some high-risk areas surpassing $7,000 and occasionally reaching $30,000. Insurers are increasingly reluctant to offer coverage in the most exposed zones, prompting calls for policy reform and broader risk-sharing approaches to avoid leaving vulnerable communities underinsured.
Parametric insurance: a weather-based safety net
One model gaining traction is parametric insurance, which pays out automatically when a predefined weather trigger occurs, without the need for loss assessments. This approach is expanding in areas where traditional indemnity-based coverage is unaffordable or unavailable. In northern Australia, for example, parametric solutions are being used to protect businesses against tropical cyclone disruptions. City-wide parametric flood schemes are already in operation in places like Fremont, California, and regional initiatives in the Pacific—often funded through public-private partnerships and blended finance—aim to shield the most vulnerable communities by enabling rapid recovery after disasters.
However, parametric insurance is not without drawbacks. Large payouts can occur without accompanying funding for on-the-ground rebuilding or broader support services, and understanding the product’s limitations can be challenging for some buyers. Experts stress that parametric tools should complement, not replace, traditional insurance and public aid, especially when it comes to long-term recovery and rebuilding efforts.
Global lessons: lessons from abroad
Countries like Spain have experimented with unique public-private partnerships to close the protection gap. The Extraordinary Risk Insurance scheme, born after Spain’s civil war, paid out billions during recent floods, illustrating how blended approaches can mobilize resources quickly. The UK’s Flood Re model, funded through a levy on all household insurers, shows how pooling risk can make flood cover more accessible. Australia’s policymakers are studying these approaches as they consider reforms to ensure affordability while maintaining incentives for risk reduction.
What this means for Australia’s insurance landscape
As climate-driven losses rise, the insurance sector faces a cyclical challenge: profitability remains sensitive to weather events, and the balance between risk transfer, affordability, and sustainability is delicate. The industry’s prognosis will hinge on embracing resilience investments, expanding access to innovative products like parametric insurance, and leveraging smart public-private partnerships to share risk and accelerate recovery.
In the near term, a two-pronged strategy appears prudent: prioritize community resilience (home hardening, flood defenses, cyclone-safe construction) and deploy innovative, transparent risk transfer mechanisms that help households and small businesses rebuild quickly after disasters. If Australia and its partners align incentives across government, insurers and communities, the long arc of increasing losses can be met with stronger protection for all.
