More Australian households may be forced to go without home cover or underinsure as premiums rise amid worsening climate change, a prudential test has found.

One-quarter of free-standing properties are expected to be uninsured or have insufficient cover by 2050, up from one in seven today, according to the Australian Prudential Regulation Authority’s first insurance climate vulnerability assessment.

“This is equivalent to about 40,000 additional households (on average) losing insurance protection every year for the next 25 years,” APRA said.

The assessment examined two “severe but plausible” global scenarios. The first assumes higher physical risks from weather-related events when no additional climate actions are taken; the second considers greater economic impacts from transitioning to lower emissions.

“Increases in direct losses from weather perils, together with climate-related economic impacts, play a significant role in widening the protection gap in both scenarios,” APRA said.

“Home insurance affordability is already a challenge for a significant number of Australian households. A widening protection gap would lead to greater uninsured losses for households and a likely amplification in prudential risk for financial system participants, including increased credit risk for banks, impacts on credit demand and supply, and constrained market growth for insurers.”

In other key findings, annual losses from weather events are expected to rise from $7 billion today to more than $16 billion by 2050; storms and hail are the largest contributors to weather losses under both scenarios; and flood risk affects more than half of Australian homes today, and the stress test shows it is the most climate‑sensitive of the weather perils.

APRA member for insurance Suzanne Smith says climate impacts on the protection gap may be much greater in rural areas.

The proportion of uninsured rural properties is expected to exceed 40% by 2050, up from 25% today. Among capital city homes, the figure is predicted to rise to nearly 20% from 11%.

“This and other findings suggest that maintaining financial system resilience will require co-ordinated action in risk reduction across insurers, governments, regulators and communities,” she told a media briefing this morning.

“Importantly, decreasing exposure to weather-related risks via mitigation is the key to long-term improvements.”

The Insurance Council of Australia says APRA’s findings confirm urgent and ambitious action is needed to protect communities from extreme weather.

“APRA’s analysis is not a forecast, it’s a worst-case scenario if extreme weather continues to worsen and further risk is baked into our system,” council CEO Andrew Hall said.

“The policy choices around investment in mitigation for homes which governments make now can help to prevent rising risk.”

APRA worked with Australia’s five largest general insurers – Allianz, Hollard, IAG, QBE and Suncorp – to conduct the stress test.

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