Insurance provided by the public sector does not reduce risk, a report on market-based mechanisms for climate change adaptation says.

Transferring risk to the public purse means governments can force homeowners in low-risk areas to cross-subsidise the insurance premiums of people in high-risk zones, according to the collaboration between Risk Frontiers at Macquarie University, Aon Benfield Analytics and the University of Colorado.

Public involvement in the insurance market allows governments to spread the cost of losses across time rather than space, and to tax people to pay for tomorrow’s disasters, the report says.

“Cross-subsidisation is increasingly difficult for private sector insurers operating in a competitive market.”

It says policymakers should reflect on the equity of such outcomes.

The researchers wanted to see how insurance from the public sector might encourage risk reduction and resilience building.

But they found it could have perverse outcomes, such as in the US, where premiums have been kept low to encourage take-up and are similar for high and low-risk areas.

This has encouraged development in high-risk areas, where rising catastrophe liability is making the schemes unsustainable.

With insurance contracts mostly running for a year, pricing will not reflect future changes in risk from increased exposure or climate change, the report says.

The best insurers can do to encourage reduced vulnerability is send price signals that reflect existing risk.

The report – published by the National Climate Change Adaptation Research Facility – examined insurance markets in the US, Spain, France and New Zealand.