After the floods, underinsurance looms: why premium subsidies are not a plan

Redaksi•Senin, 06 Apr 2026, 08.05

Floods, fire and cyclones: a growing affordability problem

In the wake of major floods along Australia’s eastern seaboard, attention often focuses on the immediate damage: homes inundated, businesses disrupted, and communities facing a long recovery. Yet another problem tends to follow close behind—an insurance affordability squeeze that can leave households and small businesses underinsured, or uninsured altogether.

Public commentary sometimes frames catastrophic floods as extremely rare events. But the broader picture presented by science and by insurance pricing is that extreme weather risks are not static. Across Australia—particularly in places prone to fires, cyclones and floods—home owners and businesses have been dealing with escalating insurance costs as the frequency and severity of extreme events increases alongside a warming climate.

Premiums have risen sharply over the past decade as insurers absorb the cost of claims and incorporate expectations about future risk. The latest report from the Intergovernmental Panel on Climate Change, published this week, predicts that global warming of 1.5°C will lead to a fourfold increase in natural disasters. For consumers, that translates into a difficult reality: as risks rise, insurance becomes more expensive, and the safety net of coverage can start to fray.

Underinsurance: the quiet crisis behind the headlines

Rising premiums do not only affect household budgets; they can reshape behaviour. When insurance becomes unaffordable, people may reduce their cover, raise their excess, or drop insurance entirely. This is how a pricing problem can become a social problem—one that is often less visible than the disaster itself.

The pattern has already been documented. In 2017, the federal government tasked the Australian Competition and Consumer Commission (ACCC) with investigating insurance affordability in northern Australia, where destructive storms and floods are particularly common. The ACCC delivered its final report in 2020, and its findings were stark.

  • The average cost of home and contents insurance in northern Australia was almost double the rest of Australia: $2,500 compared with $1,400.
  • The rate of non-insurance was also almost double: 20% compared with 11%.

Even where the most recent flooding is occurring outside the specific “riskiest areas” highlighted in that inquiry, the underlying dynamics are similar. After a disaster, those who are not insured—or who are underinsured—can face financial devastation. At the same time, premiums can rise further as insurers reassess risk and price future exposure. The result can be a feedback loop: higher premiums lead to more underinsurance; more underinsurance increases the social and economic damage when the next extreme event occurs.

Two broad ways to reduce premiums—and why they are hard

There are, in principle, two main ways to reduce insurance premiums over time.

  • Reduce global warming. This is not something Australia can achieve on its own, but it can be part of the solution. Lower warming means fewer and less severe disasters than would otherwise occur, which matters for long-run insurance costs.

  • Reduce the damage caused by extreme events. This can involve constructing more disaster-resistant buildings, investing in protective public works, or choosing not to rebuild in high-risk areas.

Both approaches focus on the underlying drivers of insurance losses: the scale and frequency of damage. They are also difficult. Climate action requires sustained policy and international coordination. Mitigation and resilience require planning, public investment, and sometimes politically difficult decisions about where and how rebuilding should occur.

The government’s preferred lever: a reinsurance pool

Instead of focusing primarily on mitigation, the federal government has put most of its eggs in a different basket: a plan to subsidise insurance premiums in northern Australia through a government-backed reinsurance pool.

In the 2021 budget, the federal government committed A$10 billion to a cyclone and flood damage reinsurance pool, described as a way “to ensure Australians in cyclone-prone areas have access to affordable insurance.” Legislation to establish this pool is currently before parliament.

To understand the intent, it helps to distinguish between insurance and reinsurance. Reinsurance is effectively insurance for insurers: a market where insurers protect themselves against the risk of very large payouts after disasters. The rationale behind the proposed pool is that if the government steps in as a wholesaler in the reinsurance market, it can offer discounted reinsurance. In theory, insurers would then face lower costs and reduce premiums charged to consumers.

However, the benefits of this approach are not automatic. There is no guarantee insurers will pass on cheaper reinsurance costs to customers. If the savings are not transmitted through to premiums, then the consumer benefit becomes unclear.

Unclear benefits, unclear costs

Even if the policy goal is straightforward—lower premiums—the mechanism raises questions. The plan effectively shifts risk from insurers to the public balance sheet, subsidising premiums for some policyholders from the public purse. That is a significant change in who carries the financial consequences of disasters.

The ACCC inquiry examined the idea of a reinsurance pool in detail. While it acknowledged there could be some benefits, it ultimately concluded the risks outweigh the rewards. The commission’s position was unambiguous:

“We do not consider that a reinsurance pool is necessary to address availability issues in northern Australia.”

This matters because the pool is being presented as a key response to affordability pressures in a region where insurance costs are already unusually high. If the central policy tool is not considered necessary by the commission tasked with investigating the problem, it raises the question of whether the policy is well matched to the challenge.

Problem one: subsidies do not target those most in need

A major weakness of subsidising insurance companies—rather than directly supporting households—is that it does not necessarily focus help on those who need it most. Insurance affordability is not evenly distributed. Low-income households can be pushed out of coverage more quickly, and once uninsured they can be hit hardest by future disasters.

There is also a growing body of research showing that natural disasters, and the ways governments respond to them, can contribute to greater inequality. If policy interventions are poorly targeted, they may fail to protect vulnerable groups, even while large sums are spent.

Community-sector analysis has argued that improving insurance access for people on low incomes who are at risk from natural disasters requires targeted support. One approach highlighted is promoting non-profit “mutual” insurance schemes. The broader point is that affordability is not only a market-wide issue; it is also a distributional issue, and policy design determines who benefits.

Problem two: only mitigation reduces the overall cost of disasters

Even if a reinsurance pool could deliver some premium relief in selected areas, it does not change the underlying cost of disasters. Ultimately, the total bill from extreme events is driven by the level of damage. If the goal is to bring overall costs down, mitigation is central.

Mitigation can include public works and practical resilience measures, such as:

  • Building levees
  • Upgrading stormwater systems
  • Conducting planned burns
  • Improving buildings, including reinforcing garage doors
  • Shuttering windows
  • Managing vegetation around homes

The ACCC’s insurance report identifies a range of ways mitigation strategies can be tied into insurance pricing. This is an important link: when risk-reducing actions are reflected in premiums, households and communities can see a direct financial benefit from resilience investments. Yet none of these mitigation-linked approaches has been incorporated into the federal government’s response to the insurance crisis as described in the ACCC discussion.

Limited support beyond government

Another notable feature of the current debate is that support for the reinsurance pool appears limited outside the federal government. The ACCC does not support it as a necessary solution. Nor, according to the same discussion, do the insurance industry or community sector advocacy organisations view reinsurance as a meaningful solution.

This lack of broad backing does not automatically prove the policy is ineffective, but it does suggest the proposal is contested among key stakeholders who have direct experience with insurance markets, consumer outcomes and disaster recovery.

Why the pool won’t help many flood-affected communities

The proposed reinsurance pool is targeted at northern Australia. That means it will not do much for people affected by floods occurring outside its geographic scope. More broadly, it does not offer a national solution to a national trend: the steady rise in insurance costs as climate-related risks intensify.

For communities in New South Wales and Queensland now experiencing severe flooding, and for the rest of the country outside the ambit of the pool, the relentless upward pressure on premiums is expected to continue. As premiums rise, more households can be tipped out of the insurance safety net, increasing the likelihood that future disasters will produce deeper and longer-lasting financial harm.

What a “better plan” needs to recognise

The insurance affordability challenge does not have a cheap or easy fix. But the policy terrain is not uncharted. Multiple inquiries and reports into insurance and climate vulnerability have mapped out options and trade-offs. What emerges from this body of work is a clear message: blanket subsidies to the insurance industry are not a substitute for taking climate vulnerability seriously and reducing risk where possible.

A more credible approach to the crisis would engage with the structural drivers of rising premiums:

  • Risk is increasing. As extreme events become more frequent and severe, insurance pricing will reflect that reality.

  • Affordability pressures create underinsurance. When people cannot pay, they reduce cover or drop it, leaving them exposed.

  • Mitigation matters. Public works and resilience measures can reduce damage and, over time, reduce the cost base that premiums are built on.

  • Targeting matters. If the aim is to keep vulnerable households insured, support needs to be designed with low-income households in mind, rather than relying on indirect pass-through from insurer cost reductions.

The stakes: avoiding a compounding disaster

Underinsurance can turn one disaster into many. The initial event causes physical damage. The financial aftermath can then widen inequalities and slow recovery, especially when households lack adequate cover. If premiums rise again after each major event, the number of underinsured and uninsured can grow, setting the stage for even greater harm next time.

A reinsurance pool may be presented as a way to ease premium pressure in a particular region. But without guarantees that savings reach consumers, without targeting those most at risk of being priced out, and without a stronger emphasis on mitigation, it is difficult to see how such a policy can address the core of the problem.

The challenge now is to move beyond narrow interventions and treat climate vulnerability as a central policy issue. The goal is not only to make insurance cheaper in the short term, but to reduce the damage from disasters and prevent Australia’s insurance safety net from shrinking further as risks rise.