Disaster risk mitigation is the answer to the north’s long-running premium affordability problem, the Insurance Council of Australia (ICA) says, as it warns against resorting to “quick solutions” that could backfire.

A government-backed reinsurance pool and insurance mutual, which have been put up for further consultation in the Australian Competition and Consumer Commission’s (ACCC) latest report, would provide, if any, only marginal relief.

“Quick solutions to pricing without addressing the underlying cause, risks disincentivising community engagement in critically-needed disaster mitigation and therefore only delays the issue of insurance affordability to the near future,” the ICA submission says.

“The only means to effect lasting change to insurance affordability and accessibility … is by adopting a systematic approach to disaster risk reduction in which the measures interact to improve the resilience of communities, reduce the residual risk of disaster and ultimately improve insurance affordability.”

Direct subsidy was also among the potential measures put up for consultation in the ACCC report released in July, which builds on the interim report issued last December.

ICA expressed support for subsidies provided the funding is directed at supporting private mitigation efforts.

It is however against the idea of subsidising premiums, calling it a “spurious solution” to the problem facing households in the region.

“This approach only offers to temporarily alleviate the symptoms of high hazard exposure, without making any lasting improvements to affordability because the underlying risk remains unchanged.

“Further, direct subsidy also creates a moral hazard by disincentivising mitigation and therefore exacerbating the ongoing risk of disaster in Northern Australia.”

On a reinsurance pool, the ICA says such a measure, as the US government-backed flood scheme has demonstrated, will only serve to keep premiums artificially low and masks from homeowners the level of hazard exposure they face.

“Reinsurance pools are bad public policy, and once implemented they become extremely difficult for Government to withdraw from,” ICA says.

“As soon as premiums are subsidised by a pool, homeowners are no longer motivated to invest in mitigation because the financial incentive of doing so has been removed.”

Click here for the ICA submission.