Australian Prudential Regulation Authority (APRA) Deputy Chairman John Lonsdale has warned insurers that they shouldn’t wait to be “dragged into action” when concerns are raised about products or services.

Mr Lonsdale said in areas including add-on insurance, unfair contract terms, conflicted commissions and questionable sales practices, insurers had left themselves vulnerable by failing to mitigate against risks that in many instances were well known.

The industry had reaped short-term profit through higher premiums, more policies sold and fewer claims paid out, but was now counting the costs, he said, while fear of “first-mover disadvantage” was still holding back some firms in responding to add-on cover issues.

“The industry’s reluctance to address fully the problems such as add-on insurance means that some issues have been taken out of insurers’ hands,” he told the Insurance Council of Australia (ICA) Annual Forum.

“My challenge to the general insurance industry is to show greater leadership in responding to concerns about products or services, rather than being dragged into action by regulators, politicians or royal commissions.”

The ICA strengthened code of practice would assist, but individual companies needed to make conscious decisions to do the right thing even when not strictly required by law, he said.

Mr Lonsdale contrasted the industry’s approach to managing its own risks to the actions required to reduce natural perils vulnerability.

“The industry arguably hasn’t always heeded the advice it gives to its policyholders – to understand their exposure to risks and take steps to mitigate against them,” he said.

Mr Lonsdale flagged tougher responses by regulators, with an APRA set to finalise a review of its enforcement by the end of next month.

“Industry can expect an APRA that is less patient on the time taken by uncooperative entities to remediate issues, more forceful in expressing specific expectations and prepared to set examples using public enforcement to achieve general deterrence” he said.

APRA is also completing a review of 36 large regulated entities, triggered by findings from a report on governance, culture and accountability within Commonwealth Bank.

Mr Lonsdale said nine self assessments from general insurers showed that management of non-financial risks in the sector is less mature than for financial risks, and culture “is an area of challenge” that isn’t particularly well understood.

Insurers that identified weakness have mostly developed remediation plans, he said.