The Australian Prudential Regulation Authority (APRA) says it is taking a close interest in underinsurance issues and affordability as part of its role in ensuring financial stability.

“From our point of view in terms of thinking about the financial system as a whole, it is not enough if insurers have the capacity to pay every claim, but there is a shrinking number of people who can actually secure insurance,” APRA Executive Director, Cross Industry Insights and Data Sean Carmody said today.

Dr Carmody says while capital adequacy remains a key focus for the regulator in the immediate term, there is also little to be gained in a scenario where there are few people taking out insurance, but every claim can be paid.

“That might mean there is no insolvency problem at an insurance level but from a financial system point of view that represents a failure, and so we are concerned about non insurance and underinsurance and over a medium to longer-term strategically we are interested in the sustainability and affordability and access to insurance.”

Dr Carmody highlighted the importance of mitigation during a Senate committee hearing today. The committee is inquiring into lessons to be learned from last year’s Black Summer.

APRA says the science suggests longer-term climate trends will increase insurance costs and Dr Carmody says there is a role for insurers in incentivising mitigation.

The Finance and Public Administration References Committee inquiry also heard from the Australian Small Business and Family Enterprise Ombudsman, which conducted an inquiry into the insurance market last year.

An ombudsman submission to the Senate committee says since releasing its report it has continued to be contacted by small businesses who can’t obtain property insurance due to changed insurer appetite for bushfire risk.

Director of Advocacy Alexandra Hordern said today those worst affected included caravan parks and also business premises that are not connected to mains water, and in some cases excess levels are being selected that are unaffordable.

Risk assessments are also increasingly being made broadly from insurer head offices rather locally, she told the inquiry.

“Decisions are certainly being made across the board rather than taking into account the unique aspects of the business in some instances,” she said.

The ombudsman has called for insurers to provide more details to policyholders on mitigation action they can take to prevent soaring premiums or to ensure they can secure cover, and to provide additional time for action to be taken before a business’s renewals fall due.

“The issue we are seeing is that the business is not given reasons for the premium increase,” Deputy Ombudsman Craig Latham said.

Dr Latham and Ms Hordern reiterated a call for the Australian Reinsurance Pool Corporation remit to be extended to natural disasters.

The Senate committee inquiry, which released an interim report last October, is due to deliver its final report by December 2.