Insurance is a mechanism for managing financial risk by pooling losses across many policyholders. The individuals or organisation enters into an agreement (via an insurance policy) to pay premiums in exchange for compensation if they suffer specified losses from unexpected events.

The insurer uses statistical analysis to predict risks and set premiums accordingly, ensuring that claims can be covered.

Importantly, insurance is designed to cover risks that are rare, rapid and random. It is not designed to cover slow-onset, predictable and cumulative processes such as gradual sea-level rise. This distinction is central to understanding why many coastal climate risks sit at (or outside!) the margins of the insurance system.

From an adaptation perspective, insurance does more than compensate losses. When it functions well, it has the potential to:

• transfer financial risk from households and businesses to broader financial markets
• incentivise risk reduction through pricing signals and policy conditions
• support faster recovery after extreme events, particularly for vulnerable populations.

However, insurance can also unintentionally discourage adaptation if poorly aligned, for example when public compensation reduces incentives for risk mitigation. Or when prolonged or perceived unfair compensation processes results in further trauma for those affected, and delays recovery.

Traditionally, insurance has served as a societal safety net, distributing losses across society and over time. In the context of climate change, the role of insurance also has social and political dimensions that influences vulnerability, recovery and long-term adaptation pathways.

When insurance works effectively – through affordable premiums, clear coverage, prompt assistance and rapid payouts – it can reduce recovery times and thus long term social harm, especially for more vulnerable populations.

Yet climate change is testing these benefits. As risks escalate, insurers respond by raising premiums, tightening terms or withdrawing cover, shifting more risk back onto households and governments.

How risk is transferred can also promote undesirable behaviour. For example, if government takes over or covers the risk, then there may be less incentive to mitigate the risk or take out private insurance.

Insurance companies operating in Australia recognise, but do not cover, damage caused by 'actions of the sea' in residential building insurance policies (called here ‘house insurance policies’: note that this discussion does not include house contents’).

The term 'actions of the sea', typically includes the following, which differ in their mechanisms and consequences.

• Sea-level rise, which increases the frequency of inundation of properties during high or king tides in low-lying areas, e.g. estuary shorelines.
• Storm surge, driven by cyclones and East Coast Lows, can cause rapid and severe flooding of buildings; rising sea levels magnify these impacts.
• Coastal erosion, caused by storm surge and sea-level rise, can remove land, cause damage to buildings or undermine foundations to cause collapse.
• In some cases, king tides, which can cause temporary flooding and exacerbate failures of urban drainage failures, especially when combined with storms

These hazards are excluded because they are cumulative, and increasingly foreseeable and so create an accumulation risk that insurer can't readily absorb. In effect, these processes challenge the conventional event-based logic of insurance.

Insurance affordability in Australia has dropped significantly in recent years. The Actuaries Institute reports that:

• in 2022 that about one million ‘vulnerable’ households spend an average of 7.4 weeks of their gross annual income on home insurance
• by 2023 report, this had worsened, with 12% of households being “affordability stressed”, spending 8.8 weeks of gross annual income on insurance.

The Actuaries Institute describes these vulnerable households as more likely to be older, renting, have less savings and are located in lower socioeconomic areas. For these households, high premiums make it harder to invest in risk reduction and in recovery from extreme events.

Insurance costs in coastal areas have long been predicted to rise due to increasing intensity and frequency of extreme events (HoR SCCCWEA 2009, Chapter 4).

Australian household insurance bills (house, contents and vehicles) have risen by 10% from 2002 to 2024 (see figure below). By 2025, in some high risk areas, premiums have risen by up to 30% due to extreme weather events and reinsurance costs.

High insurance premiums can exacerbate underinsurance, where homes are not sufficiently insured or go uninsured.

Underinsurance occurs when coverage is not sufficient to cover the full cost of a loss or claim after an extreme event: home owners end up with insufficient funds to rebuild and furnish their property, leaving them financially exposed.

Home underinsurance in Australia is already a significant (and increasing) problem for individuals and governments. Approximately 23% of Australian households do not have building or contents insurance.

This is likely to worsen with:

• high costs of living already pinching household budgets
• increasing cost of house insurance with any real or perceived increase in coastal risk

Underinsurance has problems beyond individual hardship. It presents problems for governments as it increases demands on government assistance and can entrench long-term inequality.

As coastal risks intensify, insurers may further increase premiums or withdraw from certain locations altogether.

In 2022, the Climate Council report Uninsurable Nation (Hutley et al. 2022) predicted that by 2030:

• one in 25 (or 3.6% or 520,940) properties will be ‘high risk’ and effectively uninsurable
• one in 11 (9%) properties ‘medium risk’ and potentially underinsured: their annual damage cost is approximately 0.2-1% of the property replacement cost.

This trajectory raises critical questions for coastal adaptation. Where insurability declines, communities face hard choices between risk reduction, relocation, public intervention or acceptance of loss.

Insurance plays a pivotal but limited role in coastal adaptation. It can support preparedness and recovery, but it cannot cover all risks or substitute for land-use planning, hazard mitigation or difficult conversations about managed retreat. As climate change pushes more coastal risks beyond the scope of private insurance, adaptation will increasingly require more coordinated responses across insurers, governments and communities.