Library: The Conversation – Underinsurance is entrenching poverty as the vulnerable are hit hardest by disasters

Executive summary :

More than 70 homes were destroyed by bushfires in Western Australia this week, leaving those affected facing enormous costs. After disasters like these, insurance is not always there as needed — or as expected.

The poorest members of society are affected most by underinsurance  

Underinsurance linked to poverty

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

Up to 10% of homeowners or mortgagees are without home insurance and about 40% of renters are without contents insurance. Underinsurance can make a bad situation worse, and make it harder to get back to normal after a disaster.

Our national research suggests simply telling people to get more insurance is not necessarily the answer. To understand that, we need ask why people are underinsured.

Why are so many underinsured?

A lot of underinsurance is by accident rather than design. After being burnt out by Victoria’s Black Saturday bushfires in 2009, one of our interviewees, Bridget*, told us:

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.

Where do you start?

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.

Renters are at risk of underinsurance as they tend to forego contents insurance, though the building itself will probably be insured by the landlord.

Following the Hobart floods in 2018, one of our interviewees, John, was without contents insurance when his rented home was flooded. He told us:

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.

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