Natural disaster funding arrangements should be reversed, to place the emphasis on risk mitigation rather than nationally funded relief and recovery after events, the Productivity Commission says.

The commission’s interim report released last week contains draft recommendations that are in line with insurance industry submissions to its inquiry into natural disaster funding.

It advises financial support to states and territories for relief and recovery be reduced and mitigation funding increased.

“There is a long-standing concern that governments under-invest in mitigation and spend too much on recovery, leading to higher overall costs for the community,” the report says.

In the 10 years to 2012/13, the Federal Government has spent $8 billion on post-disaster relief and recovery. State and territory governments have spent an additional $5.6 billion, sourced from the Commonwealth through various eligibility criteria.

The report says the current funding model creates a disincentive for state and territory governments to invest in mitigation and insurance.

Commissioner Karen Chester says there is also evidence of duplication, inconsistency and inefficiency in governments’ responses to disaster.

The commission recommends federal funding be capped at a cost-sharing rate of 50%; Canberra currently covers up to 75% of natural disaster relief and recovery costs.

In turn, the Federal Government should gradually increase its funding to the states and territories for mitigation from $40 million a year to $200 million, placing the onus on them to manage risks.

The insurance industry receives a pat on the back from the commission.

“Insurance markets in Australia for natural disaster risk are generally working well,” the report says. “Pricing is increasingly risk-reflective, even to the individual property level.

“Increased investment and improvements in information and analytical tools by insurers have led to more accurate and granular pricing of natural disaster risk.”

The report calls for the removal of state and territory insurance taxes and subsidised premiums, because they distort price signals associated with risk.

Written submissions to the draft report will be accepted until October 21, and public hearings will follow.