New data from the Melbourne Institute’s HILDA survey shows that more than 340,000 Australian households have no home insurance.

A further 530,000 are underinsured, which means the insurance they have wouldn’t fully cover them if disaster struck.

Mortgages on inadequately insured homes aren’t just a risk for individual homeowners; they could destabilise the entire economy.

These 800,000 households, home to more than two million people, are at risk of substantial financial harm.

Australia Institute research has found that if the average “middle Australian” household were not insured and lost their home in a disaster, they would lose about three-quarters (74.3 per cent) of their overall wealth.

Over 300,000 of these households are still paying mortgages, which means their lack of insurance poses a threat to the banks that could be left holding the bag.

It’s bad enough that an underinsured homeowner could be forced to pay higher rates (or even lose their home) if their bank discovers they have breached their mortgage conditions, which generally require full building insurance.

But with two-thirds of domestic lending from banks in Australia dedicated to housing loans, including at least $100 billion in inadequately insured mortgages, disasters hitting enough of these homes would ripple through the broader economy.

A key reason people are not fully insured is that premiums are too expensive, and prices keep rising.

Between 2022 and 2023, the average home insurance premium in Australia rose by 14 per cent, the biggest increase in a decade.

A major reason for this is climate change.

Climate change is making disasters more frequent and more destructive. As a result, insurance companies have to pay out more claims, which means they charge higher prices.

In 2022, nearly one in 20 Australians had their home damaged or destroyed because of a weather-related disaster — the highest level on record.

Meanwhile, in every single year since 2013 there have been more insured losses in Australia than the total combined losses from 2000 to 2004.

This trend isn’t confined to Australia; insurance payouts from climate disasters are rising worldwide.

This should matter to Australian homeowners because disasters abroad can push up insurance prices here are home. This is because Australian insurance companies take out their own insurance from the global “reinsurance” market.

In response to increasing risks across the world, reinsurers have raised the price of reinsurance, which flows through to Australian insurance prices.

Without government action, this situation will keep getting worse. As climate risks escalate and push insurance costs ever higher, Australia is pouring fuel on the fire.

Australia is the world’s second-largest fossil fuel exporter by carbon dioxide emissions.

No matter where in the world Australian fossil fuels are burned, they will cause the same emissions and exacerbate the climate crisis. Yet Australian governments continue to spend billions on fossil fuel subsidies each year – in 2024, these were worth $14.9 billion.

Despite unequivocal messages from climate and energy experts that Australia needs to halt the expansion of fossil fuel projects to mitigate climate change, Australia is committed to 20 new or expanded fossil fuel extraction projects.

Just three weeks ago, the Commonwealth government approved an extension on the North West Shelf gas project, one of the world’s largest gas facilities, out to 2070.

But it doesn’t have to be like this.

Australia has the opportunity to lower the risks associated with climate change and make insurance cheaper.

Eliminating fossil fuel subsidies and halting the approval of fossil fuel projects would be a start. Not only would this reduce Australia’s contribution to the climate crisis, but it would also save billions and free up workers and resources for transition and adaptation.

Australia could also make those most responsible for the climate crisis, the fossil fuel industry, start paying their fair share.

There are many ways governments could raise more revenue from this industry, from changing existing taxes and royalty systems, to introducing taxes such as a “climate damage compensation levy” on fossil fuel production.

Many of these policies would raise revenue while also discouraging the production of fossil fuels that add to the climate crisis. 

Funds raised by these taxes and levies could then be invested in a National Climate Disaster Fund, which could help pay for the costs of responding to and recovering from natural disasters, and the cost of preparing for its already locked-in impacts.

Climate adaptation strategies will be vital to managing the risks and impacts of the climate change that is already locked in. This will necessitate measures such as investments in strengthening public infrastructure, social services, and public health.

In worst-case scenarios, it may become necessary to pay for whole communities to relocate. Someone is going to have to pay for these investments, and it ought to be the companies that have profited from creating this crisis.

It does not matter if people do not believe in climate change; insurance companies know their payouts are increasing, and they will keep ramping up prices as climate risks rise.

If the government does not act to mitigate the impact of climate change and adapt to its already locked-in effects, a growing number of Australians will be forced to choose between unaffordable insurance premiums and the risk of losing everything in a disaster.

The impact on individual households would be tragic enough, but the risk to Australia’s economy makes it a problem for us all.

Jack Thrower is a senior economist at the Australia Institute