How California's wildfires could ignite higher insurance costs in Australia

Event estimated to cause over US$20 billion in insured losses

How California's wildfires could ignite higher insurance costs in Australia

Catastrophe & Flood

By Roxanne Libatique

The recent wildfires in Los Angeles, estimated to cause over US$20 billion in insured losses, are underscoring the growing challenges faced by insurance markets worldwide, including Australia.

Industry leaders and experts warn that the increasing frequency of climate-driven natural disasters will likely affect premiums and the availability of insurance globally.

The Insurance Council of Australia (ICA) has highlighted the relevance of the California crisis to Australia, pointing to parallels between the challenges in both markets, including the affordability of coverage in disaster-prone areas and a widening gap in insurance protection.

California’s insurance market struggles

According to ABC’s report, major insurers in the US have reduced or ceased offering property coverage in high-risk areas like California due to escalating wildfire risks, driven by climate change. Over the past decade, rising temperatures and more intense weather events have led insurers to reassess their exposure in the region.

California’s regulatory framework has also complicated the situation. State rules prevent insurers from factoring in future risk estimates through catastrophe modelling when setting premiums, forcing companies to rely on historical loss data. This has led several major players to withdraw from the market entirely, leaving many residents with limited or no access to adequate insurance coverage.

Professor Paula Jarzabkowski, a strategic management expert at the University of Queensland, said the situation in California highlights what is often referred to as the insurance protection gap.

“We need to assume that there are more who are also underinsured or not insured at all in Australia because premiums have gone up so much, and due to cost of living,” she said, as reported by ABC.

Global implications for reinsurance markets

Disasters of this magnitude often affect the global reinsurance market, where insurers transfer part of their risk to reinsurers to spread losses. According to the ICA, global reinsurance costs have reached their highest levels in 20 years, driven by repeated climate-related catastrophes.

Alix Pearce, the ICA’s general manager of climate, social policy, and international engagement, noted that reinsurers are struggling to maintain profitability as disasters increase in severity and frequency. In response, they have raised prices and reduced capacity, which ultimately pushes up costs for insurers and policyholders worldwide.

Australia, as part of this interconnected global market, is likely to feel the effects. Reinsurers play a critical role in supporting Australian insurers, particularly during high-loss events like cyclones, bushfires, and floods. Rising reinsurance costs could exacerbate already significant affordability challenges for Australian households.

Reducing risk to address premium growth 

Experts, including the ICA, stress that risk reduction is the most effective way to control rising insurance costs. This includes:

The ICA further warned that without decisive action, the widening insurance protection gap will leave more Australians exposed to financial loss following disasters.

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