Governments should not subsidise premiums for household or business property insurance as this would hinder effective adaptation to climate change, the Productivity Commission warns.

In its draft report on barriers to climate change, the commission says costs to the community of subsidising premiums are likely to exceed any benefits.

“If insurers are prevented from setting premiums in line with underlying risks, this could distort the incentives that premiums give households and businesses to manage their risks efficiently,” the report says.

Although there are few barriers to the Australian insurance market’s adaptation to climate change, inefficient state insurance levies should be replaced with less “distortionary” taxes, the report says.

The Insurance Council of Australia has welcomed the report, with CEO Rob Whelan saying it has “emphasised that government meddling in the insurance market benefits no one”.

However, the report says that if community benefits outweigh costs, insurers should be required to offer flood cover to all households and allow consumers to opt out.

It says there can also be a role for governments to provide information on natural hazards and to invest in disaster-mitigation infrastructure where community benefits exceed costs.