How the spread of insurance red zones could trigger a property crunch

It's the lingering stench that stands out in Kym Blackwell's mind when she walks through the rotting remains of her Townsville apartment complex.

"The smell after the floods stayed for weeks. It was just everywhere. It was vile," she says.

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The February 2019 flood — which wrought damage worth $1.24 billion in insurance costs — was unlike anything she'd witnessed in her 22 years in the coastal city.

"Never have I seen water take over the whole complex. Ever. Couldn't even get down my stairs unless you wanted to plough through waist-deep," she says.

"It's very disheartening because you're seeing a great deal of loss. People's life, their belongings, their cars, everything … You're literally helpless when something like that happens."

But the pain is far from over, it seems. The complex is expecting a 30 per cent jump in insurance costs next year — on top of a five-fold increase that has seen the annual premium soar from less than $30,000 to more than $150,000 in a decade.

"We're in a no-win situation here, to the possibility we could become uninsurable and no one will want it," she says.

It's a very real prospect, new data shows — not just for Kym but hundreds of thousands of Australians set to discover that escalating climate risks have pushed their slice of the Great Australian Dream into an expanding insurance "red zone".

A property price correction?

Dramatic hikes in insurance premiums combined with tighter lending in response to climate risk could trigger a wider property market correction, according to leading climate risk analyst Karl Mallon.

The warning comes as new analysis from his firm Climate Risk shows the number of "uninsurable" addresses in Australia is projected to double by the turn of the century to nearly 720,000 — or one in 20 — if nothing is done to address escalating risk from extreme weather and climate change.

Thousands more will see their insurance premiums double or even triple within decades, the data reveals.

The analysis, supplied exclusively to ABC News, calculates how changing climate risks (such as bushfire, flood, subsidence, inundation and extreme wind) would impact the cost and availability of insurance up to the year 2100 if all such risks were insured.

It defines a property as effectively or potentially "uninsurable" when climate risk is so high that either:

1. 1.Insurers refuse to offer cover; or
2. 2.The annual premium is priced at or above 1 per cent of the cost to replace the property — in effect, becoming so expensive as to be unaffordable and therefore effectively unavailable.

"If banks start to screen mortgages … we could see a very rapid, very sudden and relatively significant change in [property] values," says Dr Mallon, director of science and systems at Climate Risk.

"And we don't think this market adjustment will occur in 10 or 20 or 30 years when these hazards become a real problem … People are making these decisions today."

Climate Risk's clients include governments, banks, mortgage lenders and other key players in the insurance and finance industry.

But not everyone is convinced — least of all, the Insurance Council of Australia (ICA), which has previously dismissed talk of uninsurability as "scaremongering".

"Claims that parts of Australia will become uninsurable or unaffordable are irresponsible," ICA head of communications Campbell Fuller told ABC News.

"No area of Australia should be uninsurable."

Climate risk 'hotspots'

The data reveals more than 445,000 addresses where insurance is expected to become unaffordable or unavailable within 30 years, rising to 718,000 by 2100.

Three-quarters of those are in our most populated urban centres.

This is how climate risk is projected to impact insurability in Australia if no further action is taken to mitigate the impacts of climate change and extreme weather.

Each suburb is coloured by the percentage of "uninsurable" addresses in the year 2100.

Among capital cities, Adelaide will see the fastest expansion of insurance "red zones", mostly in the Adelaide Hills.

Increased risk from fire and drought will see the number of uninsurable addresses rise 10-fold, to 15,000 city-wide.

By 2100, 98 per cent of addresses in Aldgate and 86 per cent in Stirling are expected to be effectively "uninsurable".

In Newcastle-Maitland, NSW, the number of uninsurable addresses will rise five-fold by 2100, to nearly one in seven.

Wedged between the bush and the beach, the region faces escalating risk from both fire and flood.

In the waterfront suburbs of Carrington and Wickham, more than 99 per cent of addresses are expected to become effectively uninsurable.

If all climate risks were insured, Carrington would reach 90 per cent "uninsurability" in just 20 years.

By 2100, Sydney will have 91,000 the largest number of "uninsurable" addresses — the most of any city — with over five times as many uninsurable properties in 2100 than in 2019.

The most "uninsurable" areas will be concentrated near the Georges River in the south-west, the Hawkesbury River to the north and the Nepean River in the west.

Chipping Norton and Lansvale will be among the worst-affected suburbs, with more than 60 per cent of properties effectively uninsurable by 2100.

Beyond our capital cities are whole towns that might already be considered unviable if all climate risks were insured.

In Bourke, in far-west NSW, 95 per cent of addresses are already "uninsurable". Nyngan and Cunnamulla, in outback Queensland, are expected to reach similar percentages by 2100.

All three towns are nestled beside rivers and have a history of flooding.

In Shepparton-Mooroopna, which sits in a floodplain by the Goulburn River, north of Melbourne, the story is much the same.

More than 60 per cent of addresses here would already exceed the one per cent threshold, making it Australia's riskiest urban centre.

But into the future, experts say, our most vulnerable climate risk hotspots will be low-lying areas of the Queensland coast.

Here, some of our most populated cities face twin threats from riverine flooding and coastal inundation, which is set to rise dramatically post-2060.

On the Gold Coast, increased risk from flooding and inundation will push the number of uninsurable addresses to 64,000 by 2100 — or one in six.

In Palm Beach, Broadbeach Waters and Bundall, more than half of addresses are projected to become "uninsurable" by 2100.

On the Sunshine Coast, "uninsurability" will more than double to nearly 40,000 addresses by the end of the century.

In Brisbane, more than 63,000 addresses are expected to become uninsurable by 2100.

This rises to more than 50 per cent of properties in suburbs such as Rocklea in Brisbane's south and Beachmere and Toorbul to the north.

Across the continent, about 50,000 Perth addresses are projected to become uninsurable by 2100.

These are concentrated near the Canning River in the centre, in the city's east and Mandurah to the south.

In Cannington, Ferndale, Parkerville and Stoneville, more than half of addresses are expected to become uninsurable by 2100, climbing past 80 per cent in South Yunderup and Furnissdale.

Meanwhile, just a few hours' drive south, Bunbury and WA's Wheatbelt will be among the hardest-hit regions.

Already one of Australia's worst drought zones, risk from drought-related soil subsidence is expected to increase 2-3 times by 2100.

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The data analyses climate risk in terms of property damage — specifically, the average annual cost of damage to a standard dwelling.

It covers five hazards: coastal inundation, riverine flooding, bushfire, extreme winds and soil subsidence caused by drought drying out clay soils and causing them to crack or shift, damaging to building foundations.

The model combines climate change projections with:

1. 1.Information about the specific location, such as flood mapping and depths, elevation above sea level, soil type, and forest cover; and
2. 2.Data on the assumed building at that address, such as age, construction materials and design.

This is then used to calculate the probability of property damage from climate change and extreme weather for every address in Australia. The data supplied to ABC News aggregates this information across suburbs.

Some climate risks, such as coastal inundation and soil subsidence, are excluded from all insurance policies — a situation that some experts believe masks the true threat of climate change and extreme weather to property.

Other policies may exclude specific types of risk in certain areas (for example, flood risk in flood-prone areas) or charge hefty premiums to include that type of risk.

The data looks at a scenario where all such risks are insured.

Some experts have raised doubts about the data's scientific validity. Professor Andy Pitman, Director of UNSW's ARC Centre of Excellence for Climate Extremes, says Dr Mallon's data is "probably the best in the business" but it simply isn't possible to calculate climate change impacts at the level of individual properties.

"It's not scientifically very defensible," he says. But adds: "I can see absolutely no change in climate that reduces insurance risk" and efforts to use the data to explore climate risk vulnerability — rather than measure it quantitatively — would be "hugely valuable".

Dr Mallon agrees the model has weaknesses but says it is possible to apply broader climate change projections to smaller areas.

"It's common sense that if you have a house in a forest and it's getting hotter, then bushfire risks will increase. Or if you're close to the sea and oceans are rising, then flood risks will increase."

He also points out that key players are already using this kind of data and releasing his figures is, in part, about transparency. "What we're doing is unlocking these datasets and giving the public, councils, banks and other financial institutions access."

'Buyer beware'

With some 370,000 properties already effectively "uninsurable" and thousands more pushed across the threshold every year, buyers should be factoring climate risk into their property purchasing decisions, Dr Mallon says.

"You have to do your research … because no-one's going to come in and protect you. It's not illegal to sell a high-risk home in a high-risk area."

It's a trap Kym Blackwell in Townsville knows all too well.

"If it was going to be succumbed to water overflow or anything to do with climate change, why are these developments happening close to riverways or to the beaches or to the oceans?

"Why are we allowed?" she asks.

"The owners will bear the brunt of all the costs for that. It's extremely unfair."

Banks require property owners to have insurance but don't currently check that the insurance actually covers the risks that threaten that property over the life of the mortgage.

"People are operating in a 'buyer beware' situation," Dr Mallon says. "For convenience, it's 'don't ask, don't tell'."

But there are signs this is starting to change.

In 2018, two of the big four banks, Westpac and Commbank, used Mallon's data to undertake detailed analysis of the physical risks of climate change to their property and insurance portfolios.

Commbank's findings projected a 100-fold increase in "high-risk" mortgages linked to rising insurance premiums, bringing its share of high-risk properties to 1 per cent in 2060.

Westpac found 1.7 per cent of its portfolio would be exposed to higher physical risk by 2050.

Earlier this month, a Reserve Bank report warned that a failure of the insurance sector to cover climate risks would force households, businesses or governments to shoulder the burden.

"Even if correctly priced, more of these risks may become uninsurable," the report stated.

It joins a growing chorus of concern from within the insurance industry. Jacki Johnson, who represents the insurance industry as co-chair of the Australian Sustainable Finance Initiative, told ABC News that failure to mitigate future climate risks could impact whether insurance remains accessible and affordable.

"It is a very real risk for Australia both from a social point of view and economically," she says.

"And that is why the Reserve Bank is concerned, because it could impact mortgages as well."

Facing mounting pressure, the Insurance Council has been ambivalent. Last week, ICA president Richard Enthoven told the National Insurance Brokers Association Convention: "Changing weather systems may make certain regions more exposed to storm, flood or bushfire, thereby potentially making parts of Australia uninsurable."

This is out of line with comments ICA provided to ABC News for this story, which stated: "Claims that parts of Australia will become uninsurable or unaffordable are irresponsible and may serve to discourage practical action to lower risks to communities."

Dr Mallon says his company is already talking to mortgage lenders about how to screen out mortgages where the risk is so high, insurance will be either unavailable or unaffordable.

"We would expect the banks to turn down [those] mortgages. And that won't be evenly distributed; it will be concentrated in certain suburbs," he says.

"That's when you start to have clustered risks, with people living in suburbs where you can't sell a house."

It's only a matter of time before banks and other financial institutions start adjusting their lending practices, he says.

"That will trigger a more sudden change in [property] values."

However, Andrew Gissing, director of Risk Frontiers, says his company's previous research found little evidence for "a sustained decrease" in the value of houses with flood risk. Risk Frontiers specialises in catastrophe modelling and climate risk analysis, in partnership with the insurance industry.

"If insurance premiums were to rise, in theory this could provide a market signal for property prices to fall, but would be one of several factors influencing prices," he says.

'Not only a problem for insurers'

University of Newcastle senior lecturer Liam Phelan, an expert in climate risk and insurance, says access to insurance has significant implications for the equity and financial stability of the broader society.

"It's almost guaranteed that premiums will go up … And when they do, that's unlikely to be distributed evenly. Some people will lose their insurance before others do," he says.

If Australia doesn't maintain a healthy level of coverage, this could have serious repercussions not just for property owners and governments left to pick up the pieces in the aftermath of climate disaster, but, ultimately, for the viability of an insurance system.

"Insurers are in the business of selling stability. [They] do that by pooling financial risk and transferring that financial risk."

If that system, which underpins our economic system, falls apart, "It's not only a problem for insurers; it's a problem for all of us," Dr Phelan says.

Alison George, chief executive of risk consultancy Regnan, says both insurers and governments needed to be more pro-active about anticipating areas that may become uninsurable.

"[Insurers] really need to take their customers with them on climate resilience, help the community adapt and work with government," she says.

"There's clearly a government role to be played because it's lived through planning laws and … regulatory standards for physical infrastructure.

"It can't be done solely by the insurers on their own."

However, because insurance is usually only offered a year at a time, insurers can turn to a range of short-term fixes, such as increasing prices the following year or simply walking away from a high-risk area — an option simply not available to most property owners.

"[Insurers] have a lot of power but don't necessarily have a lot of vulnerability," Dr Mallon says.

The answers, he says, are in the data.

"One of our really important findings is that the building standards being used at the moment are inadequate … [But] just because the built environment is exposed to a hazard like flooding or bushfire, doesn't necessarily mean there will be damage and failure," he says.

"It's not just a problem of exposure to extreme weather and climate change; it's a problem of vulnerability."

Offering insurance to properties that are designed and constructed to withstand the climate risks in their location would send a strong market signal about resilience.

"We think that well-constructed properties in some coastal zones could be viable for insurance. Equally, we think landslip, subsidence, and so on should be covered … That would provide a strong incentive for builders to build resilient homes."

The Insurance Council's Cameron Fuller urged governments to invest in permanent mitigation and resilience measures, highlighting the importance of price signals sent by the insurance industry.

"Price signals send a message to property owners, communities and governments about their risks and serve to encourage consideration of mitigation, resilience and improvements to town planning and building codes."

Asked whether including risks like coastal flooding and ground subsidence would better enable insurers to send price signals about those risks, he said: "That's a matter for individual insurers' risk appetites."

Notes about this story

• The data does not cover cyclones, flash flooding (pluvial), coastal erosion, landslip or heat impacts.
• The model aims to "stress-test" each hazard, meaning a drier future is used to consider drought, a wetter future is used to test flood risk, and so on for each hazard. This is to avoid the diluting effects of averages but also means the model does not use a single mean projection.
• The data does not adjust for population growth, so uses a fixed number of addresses each year from 2019 to 2100.
• The figures are lower than provisional estimates the company released in March because they are based on a more resilient building — specifically, higher resilience to wind gusts, more resistance to flood damage and more rigid foundations.
• A more detailed description of the methodology is available on the Climate Risk Engines website.

Credits

• Data and reporting: Inga Ting
• Development: Nathanael Scott
• Design: Alex Palmer
• Additional reporting: Michael Slezak