Laws preventing insurers from giving financial advice mean they cannot warn consumers about underinsurance, the Productivity Commission has heard.

Suncorp Corporate Affairs Adviser Ben Honan told a hearing in Melbourne last month the insurer came up against personal advice restrictions when it wanted to send policyholders letters about new building codes in bushfire zones.

The insurer’s Senior Manager of Public Policy Duncan Bone says consumer resistance to insurer advice is also an issue: when an insurer tells customers they probably need to increase their cover, “we know that about 25% of people will actually reduce their sum insured”.

Complex interactions between insurer and consumer would be improved with an easier advice model, he told the hearing, which followed the commission’s draft report on natural disaster funding.

Mr Bone says it can be difficult to estimate rebuilding costs. Although Suncorp subsidiary AAMI offers total replacement, he says this is not the perfect answer, as shown after the Canterbury earthquakes, where the huge call on insurers meant a risk of collapse.

He says Queensland is at greatest risk, followed by NSW, and rather than allocating mitigation spending on a per capita basis, as proposed in the draft report, it might be better to prioritise funding on more exposed regions.

Commissioner Jonathan Coppel asked if governments and insurers can work together to raise awareness of risk.

Mr Bone says “there’s a huge scope to be doing more work in that area”, although insurer information and claims data can be commercially sensitive.