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What disasters can home insurance cover?

What disasters can home insurance cover?

Australia’s unique landscape is known for many things, from our stunning beaches to our iconic red centre. However, it’s also known for its harsh and unforgiveable environment – particularly in summer.

When you live in Australia, considering how a natural disaster may impact your home is an unavoidable reality. This is where home insurance can be a lifeline for disaster-affected households.

But not all home insurance cover is created equally. In fact, areas that are more prone to disasters may see residents charged sky-high premiums.

If you’re looking to buy a home in Australia, it’s crucial that you know what disasters home insurance can cover. And, more importantly, how you may be charged for that coverage.

Disaster-prone areas

If you’re looking to take out home insurance, you’ll need to find out if your home is in a natural disaster-prone area.

To do this, you’ll want to contact:

  1. Your broker/real estate agent – they should be able to tell you key features of your property’s area.
  2. Your local council.
  3. Emergency services organisations in your area.

In Australia, two of the most common disasters are floods and bushfires. Some of the key things to be asking when looking into whether your property is in a disaster-prone area is flood mapping and historical flood records as well as your property’s Bushfire Attack Level (BAL) Rating.

Your BAL Rating may influence any premiums you may need to pay to receive home insurance coverage. The BAL Rating is a 5-level scale, ranging from low risk to extreme risk:

  • BAL-12.5 – low risk
  • BAL-19 – moderate risk
  • BAL-29 – high risk
  • BAL-40 – very high risk
  • BAL-FZ – extreme risk (Flame Zone)

Unfortunately, in some cases insurers may choose not to provide insurance if they think that the risk of a significant claim being made is too great.

Insurers look at a range of factors to come to this conclusion, including your claims history, the history and/or cost of natural disasters in your area, the year your home was built, the construction materials of your home, and much more.

What disasters are considered in home insurance

Depending on where you live, these are some of the disasters you should be considering when selecting the right home insurance for your property:

  • Floods – inland flooding accounts for nearly a third of insured losses in Australia.
  • Earthquakes — although Australia doesn’t have a high incidence rate of destructive earthquakes, there have been enough, four to be exact, in the last 40 years to make it worth considering as a key point of coverage in any potential policy.
  • Cyclones — particularly if you are in the Northern Territory and northern parts of Queensland and Western Australia.
  • Bushfires — there aren’t many parts of the country that are immune to the risk of bushfires, and we have seen multiple significant losses, particularly in recent years as the climate appears to be increasing in dryness and warmth, both of which are prime conditions for bushfires.
  • Hail — severe hailstorms have become an increasing threat in recent years, and they have the potential to cause significant damage.
  • Storms — as with bushfires, severe storms have the potential to cause widespread damage across most parts of Australia.”

Source: AustBrokers Coast to Coast Insurance Brokers.

Once you’ve determined if your property is in a disaster-prone area, and what kind of disasters you may be affected by, you’ll have a better understanding of what you may be charged for coverage.

Case study: Catastrophic Australian bushfires

The Australian bushfire season that began in September 2019 was a catastrophic event that received global attention. New South Wales was most significantly impacted, with the fire spreading across the country, particularly in the east coast.

An estimated 18 million hectares was destroyed, including more than 2,000 houses. Most significantly, 34 people were killed as well as billions of wildlife.

The economic impact of these bushfires is set to exceed $4.4 billion, which left many of the Australians whose homes were destroyed wondering if their home insurance many not be able to cover the impact.

In January, Insurance Business Magazine spoke to Michael Vine, a director in the financial services ratings team at S&P Global Ratings about these concerns. Mr Vine explained that “even with the bushfires on such a scale this early during the season, insurers should be able to absorb losses stemming from the crisis.”

However, a recent ABC News article noted that following the devastating bushfire season, insurance premiums increased by almost 50 per cent.

How your postcode determines your premiums

Insurance premiums are simply the amount of money you pay for your insurance policy. Insurers are constantly looking at data to measure the amount of risk involved in insuring your property.

If natural disasters are constantly reoccurring in your area, it’s inevitable that your insurer will increase these premiums. This is to account for the level of risk involved in insuring your home.

For example, if it’s highly likely your home will be hit by a flood every few years, and your insurer will need to pay you for damages, the insurer will increase the premium for having home insurance for this disaster.

If you choose to live in the Northern half of Australia, particularly along the coastline, it is common that you may be charged higher insurance premiums than the rest of the country.

In fact, the ACCC recently reported that home, contents and strata insurance is becoming so “increasingly unaffordable” in Northern Australia, that the rate of households going without insurance is double the rest of the country.

“For example, Townsville residents pay an average of $3,088 a year for home and contents insurance, but 10 per cent of those residents face insurance premiums of $4,682 or more” noted the ACCC report.

Northern Queensland is so frequently impacted by disasters, such as cyclones and floods, that the Northern Queensland Government website designed its own comparison page on home insurance. This allows residents to carefully compare potential insurance costs as insurance premiums are so much higher here than in other parts of the country.

Tip

TIP: Insurance premiums are an important part of policy decision – but they’re not the only part. When choosing your home insurance coverage, it’s important to also look at what the policy covers, its features, claim exclusions as well as any caps. This can help you to choose the right policy for your specific home and financial needs.

Planning for disaster

Unless you have a crystal ball, it’s impossible to predict how a natural disaster may impact your home. However, insurers will try and do just this.

This is why it’s crucial that you do your research around whether your property is in a disaster-prone area and what insurance premiums are offered by a range of insurers, so you’re not surprised by any potential costs.

As the impacts of climate change are expected to worsen in Australia over the next decade, choosing the best home insurance for natural disasters for your budget is more important than ever.

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This article was reviewed by Personal Finance Editor Mark Bristow before it was published as part of RateCity's Fact Check process.

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