Investing more in public mitigation measures is the only way the “root cause” of northern Australia’s insurance affordability woes can be sustainably addressed, the Australian Prudential Regulation Authority (APRA) says.

At present just 3% of disaster funding goes to prevention and mitigation work, according to APRA’s submission to the Australian Competition and Consumer Commission’s (ACCC) latest report on the region’s struggle with escalating premiums.

It says the huge imbalance tilted towards clean-up and recovery operations must change, as climate change is widely expected to worsen further the severity and frequency of cyclones, bushfires and other natural catastrophes.

Last summer three catastrophes, including the Townsville floods, cost insurers $2.2 billion.

“APRA’s view is that insurance affordability in northern Australia is a symptom of a more fundamental underlying cause, and that real and meaningful change can only be truly brought about by focusing on the root causes rather than the manifestation,” says the submission, which was released today.

“In APRA’s view, the only way to drive real and meaningful change is by reducing the underlying natural peril costs.

“This can only be achieved through avoiding or mitigating the underlying natural peril risk: reducing the risk reduces the ongoing cost.

“Focusing on premium affordability alone will not address the root cause. Pressure to reduce premiums, without a commensurate reduction in the underlying risk, will weaken the prudential strength of insurers and may see insurers choose not to offer insurance in high-risk areas or ultimately exit the market.”

APRA says the ACCC mentioned the importance of mitigation in its latest report, but focused on measures in the private domain.

The regulator says pre-emptive public measures such as risk mapping, flood levees, sea walls and robust building codes “offer the greatest potential to address the root cause of the risk and improve affordability”.

Flood mitigation works in the southern Queensland town of Roma have led to premium reductions of at least 50%.

APRA Executive Board Member Geoff Summerhayes says that not taking the mitigation call seriously could lead to dire economic consequences as businesses and consumers struggle to pay for insurance coverage.

“Ongoing access to affordable general insurance is essential for the economic well-being of these communities,” he said today. “Without it, households and businesses in Australia’s north will struggle to recover from financial loss or gain access to credit.”

APRA’s support for mitigation programs immediately gained backing from the Insurance Council of Australia (ICA), which has long urged Canberra to allocate more financial resources to improve natural disaster resilience.

“APRA correctly identifies that lowering the risk of property damage is the only sustainable way to lower insurance premiums,” ICA CEO Rob Whelan said.

“Risk-based pricing means property owners at greater risk pay higher premiums, and ICA agrees insurance prices in northern Australia are a symptom of a much deeper problem.

“Mitigation and resilience projects should be treated by governments as nation-building infrastructure that protects communities, generates jobs and improves regional economies.”

Click here for the APRA submission.