Australia’s home insurance pressure is rising. California’s new pricing rules offer a policy template
A growing insurance challenge in a warming climate
Home insurance is becoming more expensive—and for some households, harder to obtain—as climate change worsens the frequency and severity of disasters. One analysis suggests one in ten Australian properties could be uninsurable within a decade. That projection, if it eventuates, would represent a major shift for homeowners, lenders, and governments alike.
Insurance plays a central role in recovery after a disaster damages or destroys a home. It helps people replace personal belongings, rebuild, and restore a sense of stability. When cover becomes unaffordable or unavailable, the financial shock of floods, bushfires, storms, or cyclones can land directly on households and communities.
The pressure is already visible in Australia. 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. These trends are occurring at the same time as the underlying drivers of risk—climate-fuelled disasters—continue to intensify.
Why traditional pricing rules are under strain
Historically, insurers have been required to determine risk—and set premiums—according to losses from past disasters. That approach can work when the future resembles the past. But climate change is altering hazard patterns and amplifying impacts, which means past losses may no longer be a reliable guide to the risks homes will face over the life of an insurance policy.
As disasters cause more damage and trigger more insurance payouts, insurers around the world have generally responded in familiar ways: raising premiums to cover losses, excluding certain risks from policies, or withdrawing coverage from some high-risk locations entirely. Each of these responses can protect insurer balance sheets, but they can also leave households exposed or priced out.
In practical terms, a pricing system that leans heavily on historical loss data can produce abrupt market reactions after major events. If a severe disaster hits, insurers may reassess exposure quickly, leading to sharp premium increases, reduced willingness to write new policies, or decisions not to renew existing policies in the most affected areas.
California’s market stress—and a policy experiment
California offers a recent example of what happens when disaster risk and insurance costs collide. Even before the devastating Los Angeles wildfires in January this year, California’s home-insurance market was under strain after severe disasters and rising costs.
One major contributor to rising costs is reinsurance—insurance that one insurance company buys from another to protect itself, at least partially, if it is inundated with claims following a disaster. When reinsurance becomes more expensive, those costs can flow through the system and influence what insurers charge customers, or whether they can sustainably offer cover at all.
Between 2020 and 2022, insurance companies declined to renew 2.8 million homeowner policies in California, according to CNN. That scale of non-renewals illustrates how quickly availability can tighten when insurers judge that the risks and costs are outpacing what current pricing rules allow them to charge.
In response, California has adopted a novel approach. Insurers are now permitted to use forward-looking computer models of climate change and disasters when setting premiums—on the condition that they expand coverage in higher-risk areas. The changes began earlier this year.
What makes the California approach different
Forward-looking catastrophe models are not unusual globally. Insurers in most US states, and in many other countries, already use them. What is new in California is the legal requirement that insurers using these models must expand coverage in high-risk areas.
The policy is designed as a trade: insurers gain more flexibility to price risk using models that incorporate future climate and disaster projections, while the public gains stronger protections against insurers simply retreating from the places that need cover most.
Under the new system, insurance prices are expected to be more stable from year to year. The logic is that if future risk is already built into premiums, the market may be less prone to sudden price spikes immediately after a major disaster.
How the new rules aim to reduce post-disaster shocks
Under the previous system in California, major disasters such as wildfires often led insurers to stop taking on new policies or to avoid renewing policies in high-risk areas. This pushed more people onto state-managed property insurance plans that were often costlier and more limited. At the same time, customers who remained with private insurers could face premium hikes.
The new approach aims to change that pattern. Rather than allowing the market to tighten abruptly after an event, premiums are expected to fluctuate less following disasters because future risk has already been priced in.
In exchange for being allowed to use forward-looking models, insurance companies must expand cover in high-risk areas to at least 85% of their market share across California. Insurers meeting this quota may pass some reinsurance costs to consumers.
California is also building the technical foundations for this shift. Authorities have green-lit the model insurers will apply to wildfires, and more models for other types of disasters are expected to follow. The wildfire model was produced by a private firm. California is also exploring a public wildfire model built by universities, with the aim of increasing transparency and trust in the system.
What Australia is already doing
Australia is not starting from zero. The problem of home insurance under climate change has already emerged, and government has begun to respond in targeted ways.
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 intent is to lower reinsurance costs for insurers and help retain coverage in cyclone-prone Northern Australia.
Regulators are also examining the longer-term picture. The Australian Prudential Regulation Authority is assessing how climate change could affect household insurance affordability by 2050.
And from July 2025, most large Australian entities, including some insurers, were required to begin annual climate-risk reporting. The goal is to provide more consistent information across the economy, which can support better decision-making by companies, regulators, and communities.
These steps matter, but they do not necessarily resolve the core tension: as premiums climb, availability and affordability can still deteriorate, especially in higher-risk locations.
A policy option for Australia: forward-looking models with coverage obligations
One proposal is for Australia to explore an approach similar to California’s. Under such a framework, insurers would be permitted to use forward-looking climate and catastrophe models to assess risk—so long as they maintain or expand coverage in higher-risk postcodes.
The attraction of this approach is not that it makes risk disappear, but that it could reshape how the market responds to worsening hazards. If future risk is acknowledged and priced more consistently, the system may be better positioned to avoid dramatic swings after disasters, while still keeping cover available in places where households might otherwise be left with few options.
However, the design details would matter. Any shift toward forward-looking modelling would need to balance insurer solvency, consumer protection, and public confidence in how risk is calculated.
Building models people can trust
Model governance is central to whether this kind of reform works. One suggested pathway is to use both private firms and universities to develop the models. That would provide choice for insurers and create a robust cross-check for regulators and the public.
Independent auditing would be another key element. If models are used to justify premiums and coverage decisions, they should be tested and reviewed to ensure they are fit for purpose and applied consistently.
Open data is also part of the trust equation. If the models rely on open data accessible to the general public, communities and local councils can better understand how risk is calculated and how mitigation efforts might reduce it. Transparency can help move the conversation from suspicion about pricing to a clearer view of what is driving costs.
Linking premiums to safer homes and local mitigation
One of the potential benefits of transparent, forward-looking modelling is that it can create clearer signals about risk reduction. If risk calculations are visible and mitigation actions are recognised, households and communities may be better able to see how safety upgrades translate into insurance outcomes.
In principle, it could mean people who reduce risk might be rewarded with lower premiums. Examples of mitigation actions mentioned include clearing vegetation around a home to help prevent fire spreading, or raising electrical components above flood height. These are practical measures that can reduce damage in certain disaster scenarios.
Importantly, this is not just a household-level issue. Councils and communities also have an interest in understanding risk metrics, because local planning, preparedness, and mitigation can influence exposure and vulnerability over time.
What this approach can—and cannot—achieve
Any discussion of insurance reform needs to be realistic about outcomes. Allowing forward-looking models and requiring coverage expansion is not a promise of cheap insurance. In an age of climate-fuelled disasters, especially in high-risk areas, the era of consistently low premiums is effectively over.
The more realistic goals are longer-term and structural: keeping insurance cover available, tempering sharp price spikes, and rewarding safer homes. In other words, the aim is to manage the transition to higher underlying risk in a way that avoids sudden loss of coverage and supports practical risk reduction.
Key takeaways for households, insurers, and policymakers
Climate change is already reshaping home insurance. Premiums are rising, affordability stress is widespread, and some properties may become uninsurable within a decade according to one analysis.
Traditional pricing based on past losses is under pressure. As disasters worsen, relying on historical data alone can lead to abrupt market reactions after major events.
California has introduced a conditional modelling reform. Insurers can use forward-looking climate and catastrophe models for pricing, but must expand coverage in higher-risk areas and meet a coverage quota tied to market share.
Australia has begun targeted interventions. These include a cyclone-related reinsurance scheme, regulatory assessment of affordability to 2050, and climate-risk reporting requirements from July 2025 for most large entities, including some insurers.
Transparency and auditing are central. Using private and university-built models, independent audits, and open data can help build trust and allow communities to see how mitigation lowers risk.
A measured reform agenda for a high-risk future
Australia’s home insurance challenges are unlikely to ease as climate-fuelled disasters become more damaging and more frequent. The question is not whether the market will change, but how.
California’s approach shows one way to align pricing tools with future risk while placing obligations on insurers to keep serving higher-risk areas. For Australia, exploring a similar model—carefully designed, independently audited, and transparent—could help maintain coverage availability, reduce sudden premium shocks after disasters, and strengthen incentives for safer homes and communities over time.