Australia’s Home Insurance Pressure Builds as California Tests a New Pricing-and-Coverage Deal
A home insurance system under strain
Home insurance is increasingly being tested by climate change. As floods, bushfires and storms worsen and become more frequent, the cost of protecting a home is rising—and for some households, the ability to obtain cover at all is becoming uncertain. One analysis has warned that one in ten Australian properties could be uninsurable within a decade, a striking signal that the traditional approach to pricing risk is struggling to keep up with the pace of change.
Insurance plays a central role in disaster recovery. When a home is damaged or destroyed, insurance can provide the financial support needed to replace personal belongings and rebuild. Without that backstop, the consequences of disaster can ripple for years through household finances, community stability and local economies.
Yet the same disasters that make insurance so essential are also making it harder to provide. Insurers have been facing higher losses as climate-fuelled events cause more damage to homes and trigger more payouts. Around the world, the sector’s common responses have been to raise premiums, exclude certain risks from policies, or withdraw from high-risk locations entirely.
Why traditional pricing rules are being questioned
Historically, insurers have been required to determine risk—and set premiums—based on losses from past disasters. This backward-looking framework has an obvious appeal: it uses observed outcomes to estimate the likelihood and cost of future claims. But it also has a growing weakness in a changing climate. If the future is meaningfully riskier than the past, then pricing that relies heavily on historical losses may not reflect the true level of risk households and insurers will face.
When major disasters occur under this kind of system, the market can react abruptly. After severe events, insurers may stop taking on new policies or decline to renew existing ones in high-risk areas. This can push more households toward state-managed property insurance plans that are often costlier and more limited. At the same time, customers who remain with private insurers can face sharp premium increases.
For consumers, these dynamics can feel unpredictable: a household may be able to secure cover one year and struggle the next, or see premiums spike following a disaster. For insurers, the challenge is managing rising claims and the cost of protecting themselves against them.
California’s new deal: forward-looking models, but with a coverage obligation
California has recently adopted a novel approach aimed at addressing these pressures. The change allows insurers to use forward-looking computer models of climate change and disasters when setting premiums. This is not simply a technical adjustment; it is a policy shift that changes how risk can be calculated and how quickly evolving hazards can be reflected in pricing.
What makes California’s approach distinctive is the condition attached to it. Insurers are permitted to use these forward-looking models as long as they expand coverage in higher-risk areas. In other words, the regulatory change is structured as an exchange: more flexible, future-oriented pricing in return for a requirement to keep insurance available where it is most difficult to sustain.
This reform comes after California’s home-insurance market showed signs of severe stress even before the devastating Los Angeles wildfires in January this year. The market had been buckling after severe disasters and rising costs, including the increasing cost of reinsurance—insurance that one insurance company purchases from another to protect itself, at least partially, if it is inundated with claims following a disaster.
Between 2020 and 2022, insurance companies declined to renew 2.8 million homeowner policies in California, according to CNN. Insurers argued they would cover more homes if they were allowed to use forward-looking climate and catastrophe models and pass on some reinsurance costs through the premiums charged to customers. Californian authorities adopted changes along these lines, which began earlier this year.
How the California system is expected to change price swings
In many places, forward-looking catastrophe models are already used by insurers. Insurers in most US states, and in many other countries, already apply such models. California’s approach is new because it legally requires insurers using the models to expand coverage in high-risk areas.
The change is expected to make insurance prices more stable from year to year. Under the previous system, major disasters could lead to sudden market tightening—non-renewals, reduced availability of new policies, and premium hikes for those who remained insured. Under the new system, premiums are expected to fluctuate less following disasters because future risk would already be built into premiums.
However, the reform does not promise cheap insurance. In an era of climate-fuelled disasters, particularly in high-risk areas, low-cost cover is increasingly unrealistic. The more practical goal is to keep cover available, temper sharp price spikes, and create incentives that make homes safer over time.
The coverage requirement and reinsurance pass-through
California’s framework includes a specific obligation: insurance companies must expand cover in high-risk areas to at least 85% of their market share across California. This is designed to prevent insurers from using advanced models to justify higher premiums while simultaneously retreating from the communities that need cover most.
Insurers that meet this quota may pass some reinsurance costs to consumers. This is a significant element because reinsurance costs have been rising and are a key pressure point for insurers after repeated disasters. Allowing some pass-through may support insurer participation, while the coverage obligation aims to protect access in riskier locations.
Implementation is also being staged. Californian authorities have already green-lit the model insurers will apply to wildfires, and more models for other types of disasters will follow. The wildfire model was produced by a private firm, and California is also exploring a public wildfire model built by universities to increase transparency and trust in the system.
Australia’s challenge: rising premiums and affordability stress
Australia is not facing a hypothetical problem; the pressure is already evident. Worsening and more frequent floods, bushfires and storms are pushing up average home insurance premiums. An estimated 1.6 million households are experiencing insurance affordability stress, indicating that cost is already a barrier for a substantial number of people.
These trends raise difficult questions for policymakers and regulators. If premiums continue to climb, more households may reduce cover, accept higher excesses, or drop insurance entirely—outcomes that can leave communities more financially exposed when disasters strike.
At the same time, insurers are grappling with the same underlying forces seen elsewhere: higher claims, greater uncertainty, and the challenge of pricing risk fairly and sustainably in a changing climate.
What Australia is already doing
Government and regulatory responses are emerging in Australia, reflecting recognition that market pressures are building. In 2022, the federal government introduced a scheme that provides reinsurance to insurers for cyclone-related damage on eligible policies, including home and contents insurance. The purpose is to lower reinsurance costs for insurers and help retain coverage in cyclone-prone Northern Australia.
Regulators are also looking longer-term. The Australian Prudential Regulation Authority is assessing how climate change could affect household insurance affordability by 2050, a step that signals the issue is not limited to the next few renewal cycles but could reshape the market over decades.
In addition, from July 2025 most large Australian entities, including some insurers, were required to begin annual climate-risk reporting. The aim is to provide more consistent information across the economy, which can support better decision-making by companies, regulators and the public.
These actions matter, but they may not be enough on their own if premiums keep rising and coverage becomes harder to secure in high-risk areas. The question is what additional reforms could help preserve access to insurance while improving the way risk is assessed and communicated.
A reform Australia could explore: forward-looking models tied to coverage commitments
One option is for Australia to consider a policy approach similar to California’s: permitting insurers to use forward-looking climate and catastrophe models to assess risk, as long as they maintain or expand coverage in higher-risk postcodes.
This kind of arrangement aims to balance two realities. First, risk is changing, and pricing methods may need to incorporate forward-looking information rather than relying solely on historical losses. Second, if insurers are given more flexibility to price future risk, there may also need to be guardrails to ensure that communities in high-risk areas are not simply priced out or left without options.
In practice, the goal would not be to suppress premiums artificially, but to reduce the likelihood of sudden post-disaster shocks in pricing and availability. If future risk is already reflected in premiums, the market may be less prone to abrupt tightening after major events.
Building models that are trusted: private capability and public scrutiny
For forward-looking modelling to work in the public interest, trust and transparency become central issues. A system that relies on complex catastrophe models can be difficult for households and communities to understand—especially if the models are proprietary and the data inputs are not visible.
One proposal is to use both private firms and universities to develop models. This would provide choice for insurers while creating a robust cross-check for regulators and the public. It also mirrors California’s exploration of a public wildfire model built by universities, intended to increase transparency and trust.
Independent auditing is another key element. Models could be audited to ensure they are methodologically sound and applied consistently. Alongside this, the use of open data accessible by the general public could allow communities and local councils to see how risk is calculated and how mitigation efforts might lower it.
Linking premiums to safer homes and risk reduction
One of the most practical benefits of clearer, more transparent risk modelling is the potential to better connect household and community mitigation efforts with insurance outcomes. If risk calculations are visible and credible, it becomes easier to demonstrate that certain actions reduce risk and should therefore reduce premiums.
The underlying idea is straightforward: those who reduce risk could be rewarded with lower premiums. Examples of risk reduction measures mentioned in the discussion include clearing vegetation around a home to help prevent fire spreading, or raising electrical components above flood height. If modelling and pricing reflect these improvements, insurance can become not just a financial product but also a mechanism that encourages safer building and maintenance choices.
This does not eliminate the broader challenge posed by climate change, but it can help ensure that households and communities see a clearer pathway from mitigation to financial benefit, rather than feeling that premiums only move in one direction.
What this approach can—and cannot—achieve
It is important to be realistic about the outcomes. Allowing forward-looking modelling and requiring coverage expansion is not a promise of cheap insurance. In the age of climate-fuelled disasters, particularly for high-risk areas, low premiums are unlikely to return.
What this approach can plausibly aim to achieve is more modest but still significant:
Availability of cover: keeping insurance accessible in higher-risk locations rather than allowing widespread withdrawal.
Less volatility: tempering sharp price spikes after disasters by incorporating future risk into premiums earlier.
Clearer incentives: rewarding safer homes over time, especially where mitigation steps can be shown to reduce risk.
For Australia, where affordability stress is already affecting an estimated 1.6 million households and where some projections suggest a growing uninsurability problem, the policy debate is likely to intensify. The California experiment offers a concrete example of how regulators might try to balance insurer sustainability, consumer affordability pressures, and the public interest in maintaining coverage in the places most exposed to climate-driven hazards.
Key questions for an Australian discussion
If Australia were to explore a similar pathway, several design questions would shape whether it delivers public value:
Coverage expectations: what “maintain or expand coverage” should mean in practice for higher-risk postcodes.
Model governance: how to ensure models are independently audited and credible.
Transparency: what data can be made open and accessible so communities can understand risk calculations.
Incentives for mitigation: how premium-setting can reflect household and community actions that reduce risk.
Australia has already begun responding through targeted reinsurance support for cyclone-related damage, long-term affordability assessment by the prudential regulator, and climate-risk reporting requirements for large entities. As premiums continue to climb, the next phase may involve more direct reform of how risk is priced and how coverage is maintained—seeking stability, availability, and safer housing outcomes in a climate that is no longer behaving like the past.