Source: UNISDR Disaster Risk Reduction
Furthermore, just when increasing insurance coverage should be a priority, current insurance and risk transfer markets are becoming less effective as tools for pooling and transferring disaster risk. Rising insurance premiums, driven by climate change impacts, are making coverage unaffordable for many households in climate-affected countries such as Australia.
Similarly, in the United States, where insurance is mandatory as part of house mortgage approvals, the average cost of home insurance rose from $1,902 to $2,530 between 2020 and 2023. In postcodes with the highest disaster risk, the increases were much larger, and there is increasing evidence that insurance companies are even withdrawing from what are perceived as high-risk locales.
There is a clear danger that as insurance becomes less affordable, fewer people will buy into it, pushing up costs higher and in turn leading insurers to withdraw from high-risk markets, despite the fact that these may be where the needs are most acute. This spiral can have damaging knock-on impacts: for example, property prices may fall as businesses and homeowners are unable to get mortgages or other finance in areas considered too high-risk or “uninsurable”.
Even in areas where insurance remains available, there is no guarantee that coverage will continue indefinitely. As policies are usually renewed annually, the price of insurance can rise dramatically, or coverage may even be withdrawn in the wake of a disaster.
Keeping risk transfer sustainable requires re-imagining and revitalizing risk transfer solutions such as innovations in disaster parametric insurance and the design of social safety net and risk transfer products that include build-in risk prevention incentives for consumers to make their homes safer and more resilient before a disaster occurs.