Underinsurance and disaster recovery: why “just buy more cover” misses the point

More than 70 homes were destroyed by bushfires in Western Australia this week, leaving those affected facing enormous costs. In the aftermath of disasters like these, insurance is not always there as needed — or as people expect it to be.

In Australia, where one in six children live in poverty, significant rates of underinsurance can entrench disadvantage and hardship. This dynamic is likely to worsen as the consequences of unmitigated climate change unfold.

Available figures show up to 10% of homeowners or mortgagees are without home insurance, and about 40% of renters are without contents insurance. When a flood or fire hits, gaps like these can make a bad situation worse, and make it harder for families to return to normal.

Underinsurance is not always a deliberate choice

It can be tempting to assume that people who are underinsured simply made the wrong decision or failed to plan ahead. But national research suggests that simply telling people to get more insurance is not necessarily the answer. To understand why, it helps to look at the reasons people are underinsured in the first place.

A lot of underinsurance happens by accident rather than design. One interviewee, Bridget* — who was burnt out by Victoria’s Black Saturday bushfires in 2009 — described how her family’s expectations about their cover didn’t match the reality of rebuilding:

You think okay, this is what I paid for the property […] I reckon I could rebuild it for X […] I think we had about A$550,000 on the house, and the contents was maybe $120,000 […] You think sure, yeah I can rebuild my life with that much money. But nowhere near. Not even close. We wound up with a $700,000 mortgage at the end of rebuilding.

Her experience highlights a central problem: it is hard for people to accurately calculate repair or rebuild costs. Risks are uncertain, insurers have their own complex rules, and online calculators come with their own fine print. Even when people try to do the “right thing”, the numbers can be difficult to estimate and easy to get wrong.

Renters face distinct risks — and common misunderstandings

Underinsurance doesn’t only affect homeowners. Renters are also at risk, particularly because many forego contents insurance even though the building itself will probably be insured by the landlord.

That division — building cover versus contents cover — can become painfully clear after a disaster. Following the Hobart floods in 2018, one interviewee, John, said he was without contents insurance when his rented home was flooded. He described the confusion and the consequences:

We were wondering about temporary accommodation, whether they would put us up until we found a new place to live […] They said that that was under contents insurance, which was our responsibility, and the house insurance just covers the house.

This is not simply a technical detail. For renters, contents insurance can be the difference between having support for essential needs after displacement and having to manage those costs alone. But understanding those risks, and keeping track of what is and isn’t covered, takes time, attention and confidence with complex information — all of which can be in short supply in busy lives.

Cost pressures push households into risky trade-offs

Income is closely linked to underinsurance. If you are on a lower income, you are more likely to be underinsured. In practice, this can mean choosing a level of cover that is knowingly inadequate — not because people don’t understand the stakes, but because they are forced to make hard choices within a limited budget.

Sandra, who lives in a bushfire-prone area, described how she approached insurance decisions when money was tight:

The contents is insured to $20,000 … We’ve got a lot of irreplaceable stuff here … and a lot of equipment of value … the value is going to be far more than that. But I just hope that we’d have like a small kitty that would be like $20,000. I figured would be enough to replace just the essential items.

Her account illustrates how “underinsurance” can be a form of rationing: people prioritise a minimal safety net for essentials while knowing it won’t cover the full loss. In that context, campaigns that simply urge households to buy more insurance can miss the reality that many households are already stretching to afford what they have.

Distrust and confusion can lead people to opt out entirely

Another driver of underinsurance is distrust of insurers. This may be based on previous experience of an insurance claim not coming through as expected, or political perspectives questioning the power of large corporations.

Rosalie and her family live without any house and contents insurance, and explained their hesitation in terms of how policies are written and how exclusions can be applied:

Just the way they (insurers) word things […] they’re trying to make sure they exclude certain things, and while we sort of fall within the parameters of what’s included, I have a feeling that they’ll go, ‘oh no, you’ve got a dingle on your dangle and it’s just not included’.

Whether or not that fear is borne out in any specific case, the perception matters. If people believe the system is designed to deny claims through technicalities, they may decide that paying premiums is not worth it. That decision can leave households exposed to catastrophic costs — and can deepen inequality when disasters strike.

Why “get more insurance” isn’t a complete solution

More insurance may help renters and homeowners. But deciding how much more requires access to accurate rebuild or valuation costs. It also requires the ability to interpret policy conditions and to keep information up to date as construction costs and risks change.

Accessing, understanding and maintaining complex knowledge about risk and construction is beyond the capacities of many people who already live busy lives. And for renters, deciding whether to buy contents insurance requires the time and capacity to understand the consequences of being underinsured — including what support might be unavailable after a flood or fire.

Crucially, simply encouraging people to get more insurance doesn’t help people like Sandra, who are on a limited budget, and it won’t address distrust of insurers. If the barriers are affordability, complexity and confidence in the system, then messaging alone is unlikely to shift outcomes.

Reframing the question: how can insurance work better for people?

Instead of focusing only on what individuals should buy, research suggests a broader question is needed: how can insurance work better for people?

Insurance spreads costs and risks across populations; it recognises that shared interests can create shared benefits. Maintaining the public benefit of insurance includes making it more equitable through government regulation and consumer demand.

In this view, insurance should remain about the equitable distribution of costs and risks so everyone has a safety net if disaster strikes. That principle becomes more important — not less — as disasters intensify and the financial shock of recovery grows.

Concerns about individualised insurance products

One trend to resist is the move towards insurance products tailored in response to individual characteristics and risks. The concern is that this kind of individualisation favours those with higher incomes and lower levels of risk, while marginalising disadvantaged populations living with higher risk.

In practical terms, that can put insurance out of reach for those most likely to need it. If the households facing the greatest exposure to fire, flood or other hazards are also those least able to afford comprehensive cover, then underinsurance becomes a mechanism that entrenches poverty rather than a tool that protects communities.

Insurance is only one tool — and governments have a broader role

Governments should not view insurance as the key disaster recovery tool, and must not rely on individuals to manage their own risks with insurance. Insurance is only one part of disaster preparedness and recovery.

Other measures require strong government leadership, including:

• building code reform
• effective land-use planning
• a well-funded social safety net

These tools shape how exposed communities are in the first place, and how quickly people can recover when disasters occur. When they are weak or underfunded, the burden shifts onto households — including those least able to carry it.

Avoiding blame in a changing climate

In a changing climate, governments must recognise that “we are all in this together.” Framing disaster recovery as primarily an individual responsibility can be divisive, especially when there are so many reasons why someone might be underinsured.

Telling people “Well, you should have been insured” may sound like common sense, but it can be unhelpful and unfair in practice. It overlooks accidental underinsurance driven by miscalculated rebuild costs, renters’ misunderstandings about what is covered, households forced into inadequate cover by limited budgets, and people who opt out because they do not trust insurers to pay when it matters.

It can also allow governments to shirk responsibilities toward all citizens by implying that those who struggle after disasters are simply facing the consequences of personal choices, rather than structural barriers and policy settings.

What a fairer approach could focus on

Based on the issues raised by people affected by disasters and by research into underinsurance, a fairer approach would keep the focus on equity and shared risk. That means recognising that underinsurance is not only a consumer behaviour problem, but also a system design problem — one that intersects with poverty, risk exposure and the complexity of modern insurance products.

It also means keeping insurance in perspective. It can be a vital safety net, but it cannot substitute for strong planning, resilient building standards and a social safety net that supports people when the worst happens.

* All names have been changed to protect identities.