Inflation, natural disasters, and government taxes are driving up the cost of home insurance in Australia, resulting in insurers being accused of gouging, Jefferies said in a Wednesday note.

Roughly 1.6 million households experience home insurance affordability stress, up 50% in just two years, spending 9.6 weeks of gross income to pay for home insurance, which is seven times higher than the non-stressed average.

Government taxation is the second-largest component of Australian home insurance premiums, ranking just below natural disaster risk, with state and territory governments collecting about AU$8.90 billion in insurance taxes during fiscal year 2024-2025. The amount represents AU$1.6 billion more than the entire home insurance industry made in net profit after taxes in the same year, Jefferies said.

With premium spikes in high-flood zones exceeding AU$7,000 to AU$30,000 a year, 70% of high-risk households with below-median incomes are impacted, resulting in 80% of high-risk properties completely uninsured for flood compared with a 60% insurance rate nationwide.

Jefferies reaffirmed its buy rating and AU$8.75 price target on Insurance Australia Group (ASX:IAG), and also maintained its buy rating AU$26.25 price target on QBE Insurance Group (ASX:QBE).

The firm has a hold rating on Suncorp Group (ASX:SUN) and an AU$18.40 price target.

QBE Insurance Group shares rose 1% in morning trade on Thursday.