Australia’s looming triple-dip La Niña insurance crisis

Australia is on the verge of a devastating insurance crisis due to this summer’s triple-dip La Niña weather event.

What’s occurred with the floods in Victoria looks like an unsettling precursor for the summer ahead.

I’m incredibly concerned this year’s La Niña will financially devastate a huge number of homeowners and investors who are substantially underinsured.

The Bureau of Meteorology has declared that a La Niña event is underway for the third year.

When a La Niña moves into the third year, it is called a ‘triple dip’.

That should be a huge cause for concern.

The last time a triple dip La Niña occurred was more than two decades ago from 1998 until 2001.

Because we’ve already had two wet summers, dam catchments are up and water tables are high, so flood events this year will be more likely.

We’re also still recovering financially from the previous two years of flooding which resulted in billions of dollars of damage throughout the nation.

Along with the loss of life and property, these events have exacerbated other elements that will make things difficult.

There are three reasons why this year’s flooding could be one of the most financially devastating in recent history.

1. Rising construction costs

Rising construction costs throughout the past two years mean any insurance value assessments from 12 months ago could be redundant.

Repairs to the previously flooded property have seen the demand for labour and materials continue to skyrocket.

If the heavy rains cause more widespread flooding again this year, expect to see our already strained construction industry put under further stress.

The fallout will be dramatic because costs have already risen to new highs.

For example, we’ve seen the cost of timber rise in the past twelve months by about 21 per cent and steel by around 42 per cent.

There’s every chance that if La Niña wreaks havoc this year, construction costs will remain at their record highs well into 2023 and possibly beyond.

2. Underinsurance

Australia’s property owners are already substantially underinsured.

In 2020, CANSTAR research concluded that 83% of Australians were underinsured.

Then in 2021, the Australian Bureau of Statistics noted that 2.44 million Australian households have no house and contents insurance – that’s 23 per cent of all Australian homes!

In reality, I believe over 90 per cent of properties in Australia are not carrying adequate insurance.

Also, many residential owners don’t carry out proper assessments of their property’s replacement costs each year.

Most just opt to add a little extra to last year’s guesstimate come insurance renewal time.

Worse still are those who rely solely on online calculators to help them assess their insurance values.

These wildly inaccurate “tools” are causing major headaches for those who thought they were adequately insured.

Most online calculators don’t make any allowances for consultants’ fees, demolition and forecast building cost inflation.

In addition, they miss allowances for site works, retaining walls, mature landscaping and additional works that have been carried out over time.

3. The rental crisis

Floods will have massive implications on construction programs, add continuous strain to the supply of building materials and increase upward pressure on construction costs.

This means people will be displaced for longer periods of time and will need alternative shelter.

Unfortunately, this is occurring during a time of enormous rental stress across our capital cities and major regional centres.

A big flood would only add more demand to the rental market while also removing a swathe of supply.

You can see how that equation will cause the currently dire rental situation to become even worse.

A final note...

I hate to be the bearer of bad news but watching the weather maps should concern every property owner.

I suggest the best move people can make is to be financially storm-ready.

Make sure your insurance is up to date and that it delivers comprehensive coverage.

Most important of all is to confirm you have an updated insurance value estimate for your home that has been prepared by a qualified professional such as a quantity surveyor.

This is the only way to guarantee you have adequate coverage as a safety net against the weather.

About Mike Mortlock Mike Mortlock is a Tax Depreciation expert, Quantity Surveyor and Managing Director of MCG Quantity Surveyors. He is a regular property commentator having been featured in the Financial Review and Sky Business. MCG Specialise in Tax Depreciation Schedules and Construction Cost Estimating for investors. You can visit them at www.mcgqs.com.au