How do natural disasters affect insurance premiums?
Short answer
Insurers estimate the expected cost of claims from each natural peril separately, such as flood, cyclone, bushfire and storm, and build it into each property’s premium according to its relative risk. In 2024–25 the average home and contents premium was almost $5,000 in north Western Australia, compared with $2,310 outside northern Australia.
How insurers price natural hazard risk
Insurers split expected claims into working claims, such as theft, glass and water damage, and natural peril claims. They generally model each peril separately, estimating how often claims occur and how much each one costs. The models for natural perils are generally developed by industry specialists or reinsurers and supplemented with insurers’ own claims data. Some insurers estimate the average annual loss for a peril across their portfolio and allocate it to policies by relative risk. Others build up the expected cost policy by policy (ACCC 2020, 62).
These models combine:
- Hazard. How likely and how severe floods, bushfires, cyclones and storms are at that location.
- Exposure. What is at risk: the building, its contents, and their value.
- Vulnerability. How much damage a given event would cause, which depends on construction, elevation and other features.
Insurers also buy reinsurance to cover very large losses, and hold capital to pay claims after a very bad year. Insurers pass higher reinsurance costs on to consumers, and the cost of capital is part of the cost of insurance (Huang 2024).
Recent disaster losses
The Insurance Council of Australia reported $7.17 billion in insured losses from more than 300,000 claims across the 2022 flood events (Insurance Council of Australia 2023).
Reinsurance and the cyclone pool
The Actuaries Institute found that home insurance premium increases in the year to March 2024 were primarily a consequence of higher reinsurance costs during 2023 (Actuaries Institute 2024).
The Australian Government set up a cyclone reinsurance pool, run by the Australian Reinsurance Pool Corporation, from 1 July 2022. It is backed by a $10 billion government guarantee and covers cyclone and related flood risk for home, contents, strata and small business policies (ARPC 2026).
After insurers joined the pool, the ACCC found that average home insurance premiums per $100,000 sum insured in higher cyclone risk areas fell 11% in the first year. In areas with no cyclone risk they rose 6%. Up to two years after insurers joined, premiums in higher-risk areas were 14% below pre-pool levels. Insurers are passing on the lower reinsurance rates to policyholders in higher cyclone risk areas. More insurers now recognise mitigation by policyholders, but some have yet to put a framework in place (ACCC 2026).
Climate change
Australia’s climate has warmed by 1.51 ± 0.23 °C since national records began in 1910. CSIRO and the Bureau of Meteorology report an increase in extreme fire weather and a longer fire season across large parts of the country since the 1950s. Heavy short-term rainfall events are becoming more intense (CSIRO and Bureau of Meteorology 2024).
APRA’s 2026 climate stress test found that, under a scenario with higher physical risks, expected annual losses from weather-related events could rise from less than $7 billion a year in 2024 to more than $16 billion by 2050, in 2024 dollars. APRA states that this is a stress scenario, not a forecast (APRA 2026).
Last reviewed 4 November 2026.