Risk to Australia's financial system highlighted by actuary due to insurance deficit
In the face of escalating climate change, there is a pressing need for banks to provide loans for adaptation measures, particularly in vulnerable geographic areas of Australia. This need is further emphasised by the increasing unaffordability of insurance, a trend that has been creeping up over the years.
One potential solution to free up public money for building resiliency in communities, including low-income areas, is the issuance of green adaptation bonds. However, banks may need to conduct more thorough assessments when making home loans, potentially denying loans for homes that are uninsurable.
The insurance industry in Australia is grappling with a lot of uncertainty due to the trend in extreme weather events. Insurance companies may reduce their appetite for property risk, stop underwriting some risks, or even increase premiums. In their latest assessment from 2024, Finity found that 15% or about 1.6 million households have insurance premiums that would exceed a month of their gross income.
This unaffordability of insurance could cause a downward spiral for the banks. If unaffordable insurance loans were to go under, it could lead to a severe crisis for the banking system in Australia. Approximately 3% of bank loan assets are likely to have unaffordable insurance, equating to roughly AUS$60 billion.
To mitigate this risk, policymakers need to ensure an efficient use of funds to deal with the problem of climate change. Mandatory climate disclosures, which go into effect this year, aim to help people understand the impact of climate change on the financial system.
The unaffordability of insurance is a severe risk to Australia's economy, and it is essential to find solutions. According to Paddam, the best solution is to find adaptation solutions, especially for housing. Unfortunately, there are no specific policymaker entities identified in Australia that contribute to improving the resilience of houses and provide funds for adaptation measures.
The insurance gap in Australia is a pressing issue that requires immediate attention. Reinsurers also face a lot of uncertainty due to the trend in Australia, and climate change is making things worse everywhere, reducing the benefit of risk diversification.
In 2022, Finity found that 10% of households had unaffordable insurance, which increased to 12% in 2023. As extreme weather events become more common in Australia and the world, it is likely that the unaffordability of insurance will continue to increase, posing a significant threat to the stability of the housing market and the wider economy. It is crucial for all stakeholders to work together to find sustainable solutions to this growing crisis.
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