1. Introduction

This report assesses Australia’s home insurance protection gap and its implications for financial system resilience under climate stress scenarios. It highlights affordability pressures, rising climate risks, and the potential for increasing uninsured losses affecting households, insurers, banks and government.

1.1 Insurance plays an important role in the resilience of Australia’s financial system

Insurance transfers financial risk from households to insurers, supporting recovery from weather events and protecting mortgage collateral. It underpins household wealth and banking stability, given housing is the largest household asset and mortgages dominate bank lending.

1.2 The home insurance protection gap

The protection gap reflects uninsured or underinsured losses, largely driven by affordability. Premiums have grown faster than incomes, influenced by weather risks, construction costs and reinsurance. Between 2015 and 2024, 33% of catastrophe losses in Australia were uninsured, indicating a persistent gap.

1.3 The impact of a widening protection gap

A widening gap increases financial exposure for households and lenders. Uninsured losses can reduce household wealth, increase mortgage default risk, lower property values, and raise fiscal pressures on governments. It also reduces insurance market growth and system resilience.

1.4 How APRA’s stress test explored the future of home insurance affordability

APRA modelled outcomes to 2050 using two NGFS climate scenarios. Five major insurers assessed premiums and risks. Affordability was measured by premiums exceeding four weeks of income, with no assumed policy or adaptation changes, isolating climate and economic drivers.

2. Key findings

The analysis finds a sustained increase in the protection gap under both scenarios, driven primarily by climate-related risks and affordability pressures.

2.1 Under both scenarios a widening insurance protection gap leads to more uninsured losses

Currently, one in seven households are uninsured; this may rise to one in four by 2050, adding around one million uninsured households. This increases uninsured losses and amplifies financial risks across the system.

2.2 The drivers of a widening insurance protection gap differ in each scenario

Climate risks drive around 80% of the increase. In the higher emissions scenario, rising weather losses increase premiums, with losses exceeding $16 billion annually by 2050. In the delayed transition scenario, construction cost inflation and slower income growth reduce affordability.

2.3 The insurance protection gap is likely to remain geographically concentrated

Regional and rural areas face higher uninsured rates, potentially exceeding 30–40% by 2050, compared to around 20% in cities. New South Wales and Queensland account for around 60% of uninsured households due to higher risk exposure and lower incomes.

3. Addressing the home insurance protection gap and its related risks

A coordinated response across government, industry and communities is required to reduce risks and improve affordability.

3.1 Reducing weather peril risks

Risk reduction is the most effective long-term solution. Measures include resilience infrastructure, improved building standards, land-use planning and emissions mitigation. These reduce losses and downward pressure on premiums.

3.2 Improving insurance affordability

Innovation in insurance products and targeted public policy interventions can support affordability. However, measures must balance cost reduction with maintaining risk signals and managing fiscal impacts.

3.3 Managing risks to the financial system

Banks face higher credit risk from uninsured borrowers, while insurers may face societal pressure. Strengthened risk management, capital adequacy and coordination are required to maintain system resilience.

4. Frequently asked questions

This section outlines methodology and assumptions underpinning the analysis.

4.1 How were the insurance CVA scenarios designed?

Two NGFS scenarios were applied: a higher emissions scenario (+2.5°C) and a delayed transition scenario (+1.8°C), incorporating physical and economic impacts tailored to Australia.

4.2 How were the insurance premiums modelled?

Insurers estimated premiums using expected losses, reinsurance costs, expenses and taxes, assuming constant pricing structures and no future policy changes.

4.3 Which houses were in scope of the analysis?

Around 10 million freestanding homes were analysed, excluding strata properties, providing a national view of insurance affordability and risk.

4.4 How was the protection gap estimated?

The gap was calculated by comparing premiums to household income, with unaffordability defined as premiums exceeding four weeks of income. This identified households likely to be uninsured over time.