Only a year after losing their homes to floods in parts of Australia’s north eastern coast of Queensland, people are moving into new houses built on or near the same plots.

But while banks have been only too willing to offer them long-term loans at rates in line with the national average, insurance companies, who suffered insured losses of A$1.24 billion ($820 million) as a result of the Townsville floods, are more cautious.

A tradesman who has bought a new home in Townsville after walking away from his water-damaged dwelling 15 kilometers (9.32 miles) away, said the insurance premium had risen 350%, a price he was not willing to pay to protect against another flood.

"Locals call this place ‘Brownsville’, that’s how dry this place was. So it is unfair for insurers to react in such an extreme manner after just one event. This was a once-in-a-500-year flood, it won’t come again in my lifetime," the tradesman, who would only be identified by his surname Cullen, said.

Banks appear to be taking a similar view, with long-term funding still widely available for new and existing housing, while insurers are more picky.

Allianz, for example, has become more selective about writing new policies in Townsville, brokers said, while others including Suncorp and QBE stopped covering large apartment units after the Queensland floods.

The insurers agree that the floods were previously a 1-in-500-year event, but say climate change has made such events more frequent.

That divergence is echoed across regions in developed countries which have been hit by floods, forest fires or other extreme weather-related events linked to climate change and is worrying regulators and industry executives.

They fear banks are building up portfolios of long-term loans against construction projects, infrastructure and real estate that are becoming uninsurable.

Extreme weather could depress property prices and leave banks exposed to defaults on home loans or large commercial projects. Without insurance, owners may be unable to afford the cost of maintaining their properties.

Among those most concerned is Larry Fink, boss of the world’s largest investor, BlackRock, who warned in his annual letter to company boards in January about the risks to banks if insurance dries up. Fink said banks may no longer be able to offer 30-year mortgages, which he described as "a key building block of finance", if fire or flood insurance are not available.

In Italy, insurers refuse to provide flood coverage to Venice, where flooding is a regular occurrence and has been getting worse due to climate change.

During the Townsville floods, the hit to banks was less marked and as insurers depart, new housing developments continue to spring up, backed by the country’s major banks.

"As a banker we have a presumption with our customer that insurance will generally be available and affordable. That’s changing," said Mathew Murphy, head of social & environmental risk at Australian and New Zealand Banking Group.

"What has changed is the awareness and emergence of potentially more severe climate damage, be it storm, fire or other climate danger," he added.

‘TRICKY’

The potentially dangerous divergence between the approach taken by banks and insurers over housing and climate change has been flagged at the highest levels of finance.

While banks around the globe are starting to do more to understand the risks, the pace of change is slow.

Bank of England governor Mark Carney is among those pushing for financial services firms to better understand and be more transparent about climate risk and plans to mitigate it.

While banks did better than many other sectors in some areas on how climate risk impacts their business, a 2019 assessment by the Task Force on Climate-related Financial Disclosures (TCFD) found just 20% reported on the resilience of their strategy.

Insurers are ahead when it comes to modeling risk, with teams of scientists and hundreds of years of data to call on, but climate change represents uncharted waters.

Australia is following the BoE’s lead with plans to stress-test banks and insurers on climate risk, as regulators fret that rare natural disasters become commonplace.

"We are discussing this with the banks. But do we have a solution yet? That’s where things get tricky," a person directly involved in discussions between Australian banks and insurers said.

While developing markets have always suffered from a lack of insurance, the problem is now expanding in developed ones.

In California, which has suffered devastating wildfires in recent years, the regulator said that areas affected in 2015 and 2017 saw a 10% increase in insurance non-renewals in 2018.

The regulator issued a mandatory one-year moratorium on insurers failing to renew policies in wildfire disaster areas in December 2019. And to raise money to protect properties against climate risk, the state is planning to launch a resilience bond.

Although some U.S. banks are now more cautious about being over-exposed to climate-change affected areas, they have not backed away from flood-prone states like Florida or California.

But in hurricane-prone states like Texas and Florida, investors are betting against the U.S. residential mortgage bond market, because they say outdated flood maps mean insufficient homeowners are buying flood insurance.

"I can no longer trust my history - weather patterns have fundamentally changed," Zurich Insurance Group’s Chief Risk Officer Peter Giger told an industry event in January.

BAD LOANS CALM

A year on from the Townsville disaster, one reason banks are happy to lend is that while the proportion of customers who were more than 30 days behind on their mortgage rose from 2% to 2.3% after the floods, it soon dropped back to 1.9%.

Banks have also been helped by support from the local and federal government, and they are often willing to postpone some repayments to help borrowers get back on their feet.

While these measures have worked so far, policymakers are concerned about the potential for persistent floods and fires to spur large-scale migration, triggering a surge in bad loans.

Deadly bushfires in parts of New South Wales in late December have underlined the scale of Australia’s problem.

The number of loans in arrears is expected to balloon as the inferno disrupted the peak holiday season, hitting consumer spending, destroying thousands of homes and killing 33 people. Ratings agency Moody’s warned that more frequent and severe natural disasters highlighted growing risks to the credit quality of Australia’s A$1.8 trillion residential mortgage portfolio, the biggest source of revenue for the nation’s banks. And the fires have cost insurers more than A$5 billion.

Mortgage brokers in Queensland state said that banks can insist on more documentation in high-risk postcodes, including evidence of insurance prior to agreeing a loan, but the rigor with which they enforce the rules is patchy.

Commonwealth Bank of Australia, the largest mortgage lender, declined to comment. National Australia Bank said it mostly focused on a borrower’s capacity to service and repay a loan, while Westpac said it had "standard credit controls".

All declined to say whether or not they had shrunk their loan book in high-risk zones as a result of the losses.

The long-term forecast for Australia is not good, with insurer IAG predicting that climate change could "start to render existing housing stock uninsurable".