Finity has cautioned against using a Medicare-style pricing model to tackle the growing premium affordability problem facing residents who live in areas that are prone to bushfires.

The actuarial firm says the idea, flagged in May by a University of NSW report, will not work because health insurance and property insurance are very different.

Finity says there is an incentive for equitable access to a universal heath scheme because every Australian resident runs the risk of becoming injured or ill. But the same can’t be said for property risk as not everyone lives in an area with elevated bushfire threat.

“Social justice advocates often favour cross subsidies to protect against higher prices, but often the impact on those asked to pay these subsidies (those with lower risk) is overlooked,” Finity said in a blog post.

“In property insurance most policyholders are not exposed to significant bushfire risk, and some will never be even under climate change.

“From a social fairness perspective, should property owners pay a bushfire premium without the prospect of ever benefitting?”

The university report, Social Justice and the Future of Fire Insurance in Australia, had suggested a publicly-funded scheme modelled after Medicare offers the best approach to countering the impact of rising premiums caused by climate change-fuelled bushfires.

It says bushfires will become more frequent and severe and the current market-based model of setting home premiums for at-risk properties is increasingly untenable.

The report questioned if the "pure actuarial fairness" pricing model should still be used to assess future risk as climate change takes hold.

Finity says the current pricing mechanism used by insurers has created a “vibrant private market” to set premiums according to the risks involved.

“Risk based premiums serve a public purpose by incentivising individuals to lower their risk,” Finity said. “Unaffordable or uninsurable risks are indicative of high burden to society.

“Subsidised premiums can create incentives to build in high risk areas, thus raising costs for everyone. This is precisely what has been observed in the US where the government makes highly subsidised flood and windstorm insurance available in high-risk areas.”

Finity acknowledges the university report has raised important issues that merit consideration as the severity and frequency of freak weather events accelerates because of climate change.

It expects “price dislocations” in high-risk areas facing bushfires and other perils to result in the future but believes there are “less disruptive solutions than transforming part of the property insurance system into a version of Medicare”.

Click here for the Finity post.