Taxes on insurance are counter-productive and must be abolished, the Insurance Council of Australia (ICA) says, as it again urges governments to do away with the “regressive” system.

Not only do such taxes penalises consumers who buy insurance, they also discourage people from mitigating their risks, which would have long-term negative consequences when natural disasters strike, ICA says in a submission to the NSW Government Productivity Commission.

The commission last month released a discussion paper that called for feedback on ways to improve the state’s living standards. Among the topics listed in the paper are modernising the state’s tax system, including insurance taxes.

“A strong body of economic analysis consistently demonstrates the inequities and economic inefficiencies of taxation on insurance, including emergency services levies,” the ICA submission says.

It urges state and territory governments “to commit to and prioritise the abolition of insurance-based taxes. This would immediately improve insurance affordability and increase the take-up of insurance.

“Furthermore, it would reduce the need for government funding in the aftermath of natural disasters, thereby shifting the burden of disaster recovery from the public to the private sector.”

ICA says the total economic cost of natural disasters is set to reach $39 billion a year by 2050, up from $18.2 billion. Its show state and territory governments have collected a combined $54.7 billion in the past 12 years from insurance taxes.

NSW collected the most at $18.2 billion, but the state also has the lowest take-up of home and contents insurance.

In a submission insurer IAG has made to the NSW Review of Federal Financial Relations, it pushes for reforms to the current arrangement including the removal of the emergency services levy.

Like ICA, the insurer believes a broad-based property levy is the best way to move forward.

“The change will be fairer for our community as these important services will now be funded by all property-owners, not just those with insurance,” IAG says in the submission.

“Removal of the emergency services levy on insurance will also see savings in insurance premiums passed on to customers. This is an important first step in addressing insurance affordability, accessibility and participation.”