Australia’s Home Insurance Pressure Is Rising. California’s New Pricing Rules Offer a Policy Template
A growing home insurance problem, driven by climate risk
Home insurance is becoming more expensive and, for some households, increasingly difficult to obtain as climate change intensifies the frequency and severity of natural hazards. One analysis has suggested that one in ten Australian properties could become uninsurable within a decade. That prospect is not only a financial concern; it also raises questions about recovery after disasters, the resilience of communities, and the stability of housing markets in higher-risk areas.
Insurance plays a central role in helping people rebuild after a disaster damages or destroys a home. It can provide the funds needed to replace personal belongings and to repair or reconstruct a property, supporting households as they attempt to restore their lives. When insurance becomes unaffordable or unavailable, the pathway to recovery becomes harder, and the burden can shift to individuals and governments.
The pressure on home insurance markets is not unique to Australia. Insurers globally have been grappling with rising losses and higher costs as disasters become more damaging. In response, many insurers have raised premiums, excluded certain risks from policies, or withdrawn coverage entirely from some high-risk locations. These actions may help insurers manage their exposure, but they can leave households with fewer choices and higher costs, particularly in areas prone to floods, bushfires, storms, or cyclones.
Why traditional pricing can struggle in a changing climate
Historically, insurers have been required to determine risk and set premiums based on losses from past disasters. This backward-looking approach has long been a foundation of insurance pricing. However, it can become less effective when the risk environment is changing rapidly. Climate-fuelled disasters are worsening, causing more damage to homes and triggering more insurance payouts. When the past is no longer a reliable guide to the future, pricing based mainly on historical losses may fail to reflect the true trajectory of risk.
One consequence is that premiums can jump sharply after major disasters, as insurers reassess their exposure and attempt to cover losses. Another is that insurers may avoid offering new policies or may decline to renew existing ones in areas they consider too risky. In practice, this can mean that customers face sudden changes: higher premiums, reduced coverage, or the loss of access to private insurance altogether.
These dynamics can create a cycle of instability. As private coverage contracts in high-risk areas, more households can be pushed toward alternative arrangements that may be more expensive or provide more limited protection. At the same time, customers who remain with private insurers can experience premium increases, particularly after large-scale events.
California’s policy shift: forward-looking models, paired with coverage obligations
California has introduced a novel approach intended to address these pressures. Under new rules, insurers are permitted to use forward-looking computer models of climate change and disasters when setting premiums, provided they expand coverage in higher-risk areas. The policy aims to balance two objectives that can be in tension: allowing pricing to better reflect future risk, while also maintaining access to insurance in the places that need it most.
This change emerged in a context where California’s home insurance market was already under strain. Even before the devastating Los Angeles wildfires in January this year, the market had been buckling after severe disasters and rising costs. A key factor in those rising costs has been reinsurance—insurance that one insurance company purchases from another to protect itself, at least partially, if it is inundated with claims following a disaster.
In California, insurers argued they would cover more homes if they were allowed to incorporate forward-looking climate and catastrophe models into pricing, and if they could pass on some reinsurance costs through premiums. Authorities adopted changes that began earlier this year. According to CNN, insurance companies declined to renew 2.8 million homeowner policies in California between 2020 and 2022, underscoring the scale of the market stress that policymakers were attempting to address.
What makes the California approach different
Forward-looking catastrophe models are not new globally. Insurers in most US states, and in many other countries, already use such models. What distinguishes California’s approach is the legal requirement that insurers using these models must expand coverage in high-risk areas. In other words, the use of forward-looking modelling is paired with a coverage obligation.
The change is expected to make insurance prices more stable from year to year. Under the previous system, major disasters such as wildfires could lead insurers to stop taking on new policies or to avoid renewing policies in high-risk areas. That, in turn, pushed more people onto state-managed property insurance plans that were often costlier and more limited. Meanwhile, remaining customers of private insurers faced premium hikes.
Under the new system, premiums are expected to fluctuate less following disasters because future risk would already be built into premiums. The intention is not to eliminate the upward pressure on prices in a higher-risk climate, but to reduce the sharp, reactive spikes that can occur after major events.
The trade-off: market share coverage targets and reinsurance costs
California’s framework includes a specific exchange. Insurance companies that use the models must expand cover in high-risk areas to at least 85% of their market share across California. Those meeting this quota may pass some reinsurance costs to consumers. This structure attempts to ensure that the ability to price using forward-looking risk is not used simply as a justification for withdrawing from difficult markets.
Implementation is proceeding step by step. Last month, Californian authorities approved the model insurers will apply to wildfires. Additional models for other types of disasters are expected to follow. The wildfire model was produced by a private firm, and California is also exploring a public wildfire model built by universities, with the aim of increasing transparency and trust in the system.
Australia’s insurance affordability and availability pressures are already evident
Australia is not starting from scratch on these issues. The problems associated with home insurance under climate change have already emerged. Worsening and more frequent floods, bushfires and storms are pushing up average home insurance premiums. An estimated 1.6 million households are experiencing insurance affordability stress, indicating that rising premiums are already affecting household budgets at scale.
Government action has begun to respond to some of the pressures. In 2022, the federal government introduced a scheme that provides reinsurance to insurers for cyclone-related damage on eligible policies, including home and contents insurance. The scheme lowers reinsurance costs for insurers and is designed to help retain coverage in cyclone-prone Northern Australia.
Regulators are also looking further ahead. The Australian Prudential Regulation Authority is assessing how climate change could affect household insurance affordability by 2050. And from July 2025, most large Australian entities, including some insurers, were required to begin annual climate-risk reporting, which is intended to provide more consistent information across the economy.
Even with these initiatives, the underlying trend remains: as premiums continue to climb, the question is what additional policy tools might help keep cover available and reduce destabilising price swings—particularly in higher-risk postcodes.
A policy option for Australia: allow forward-looking models, require coverage expansion
One option Australia could explore is a version of California’s approach: permitting insurers to use forward-looking climate and catastrophe models to assess risk, as long as they maintain or expand coverage in higher-risk postcodes. The premise is to modernise risk assessment in a way that reflects the future climate reality, while also preventing a simple retreat from high-risk communities.
Such an approach is presented as having the potential to keep home insurance prices more stable, ensure coverage in risky areas, and make homes safer over time. Stability here does not mean low prices; rather, it means fewer abrupt changes and fewer sudden withdrawals of coverage following disasters.
Model development: combining private expertise and public confidence
Model design and governance would be central to any Australian adaptation. The California experience points to a hybrid pathway: models can be produced by private firms, while universities can also be involved in building public models to increase transparency and trust. Applying a similar principle in Australia could provide insurers with choice while also giving regulators and the public a robust cross-check.
Another element proposed is independent auditing of models, alongside the use of open data accessible to the general public. This kind of transparency could help communities and local councils understand how risk is calculated and how mitigation efforts lower it. In turn, it could support more informed local decision-making and provide clearer signals about what kinds of investments reduce risk over time.
Linking risk reduction to premiums: creating incentives for safer homes
A key practical advantage of transparent, forward-looking risk models is the possibility of more direct links between mitigation and insurance pricing. If risk calculations are visible and based on accessible data, households and communities can better see how specific actions may affect risk profiles and, potentially, premiums.
Examples of mitigation actions cited include clearing vegetation around a home to help prevent fire spreading, or raising electrical components above flood height. The broader idea is that those who reduce risk could be rewarded with lower premiums. This does not eliminate the underlying hazard, but it can encourage incremental improvements in resilience and safety.
What this approach can—and cannot—achieve
Any discussion of reform needs to be realistic about outcomes. Allowing forward-looking modelling and requiring coverage expansion is not expected to make insurance cheap. In an era of climate-fuelled disasters, the period of broadly low-cost insurance—especially in high-risk areas—is described as effectively over.
The more realistic goal is long-term: keeping insurance cover available, tempering sharp price spikes, and rewarding safer homes. These aims focus on market functioning and household protection rather than promising a return to past pricing conditions that may no longer be viable.
Key takeaways for Australian policy debate
Climate change is already reshaping insurance markets, with rising premiums and increasing difficulty securing cover in some locations.
Traditional, backward-looking pricing has limits when future disaster risk is worsening, contributing to instability after major events.
California’s reform pairs forward-looking pricing with coverage obligations, aiming to stabilise premiums and maintain access in high-risk areas.
Australia has begun targeted interventions, including cyclone reinsurance support and climate-risk reporting, but affordability stress remains widespread.
A transparent, audited modelling framework—potentially involving both private firms and universities—could support trust and help link mitigation to pricing.
Where the conversation goes next
Australia’s home insurance challenges are intensifying as disasters become more frequent and damaging. The policy question is not whether risk is increasing, but how to manage the consequences in a way that keeps households protected and markets functional. California’s recent move offers a structured example of how governments might allow more realistic risk pricing while still insisting that insurers serve higher-risk communities.
For Australia, exploring such an approach would involve careful design: deciding what coverage obligations would look like, how models would be developed and audited, and how transparency could be built into the system. The aim would be to support availability of cover, reduce volatility in premiums after disasters, and encourage safer homes over time—accepting that in a changing climate, insurance will remain a significant cost, particularly where hazards are greatest.