So-called “targeted subsidies” may be needed to address the challenge of higher premiums in bushfire-risk areas as climate change takes hold, Finity says in a blog post.

It also warns against using a Medicare-care pricing model to solve the problem.

The idea of replicating the publicly funded health scheme was first flagged in a recent University of NSW report but the actuarial firm believes there are “less disruptive solutions” to consider.

“What we’re suggesting is there may need to be a response targeted at people under premium stress which could involve a subsidy to help pay premiums, perhaps targeted at lower-income people,” Principal Rade Musulin told insuranceNEWS.com.au.

“In many respects that was the core point the University of NSW study was getting at – that there are people who find themselves facing higher risk through no fault of their own.

“The question is how to help such people without causing other problems, such as reducing incentives for risk mitigation or disrupting an otherwise well-functioning insurance system.”

The university report, Social Justice and the Future of Fire Insurance in Australia, had suggested a publicly funded scheme modelled after Medicare as 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.

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,” it says. “Unaffordable or uninsurable risks are indicative of a 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.