Councils fear their insurance premiums will soar if the Productivity Commission’s interim report on natural disaster funding is implemented in full.

The commission has called for federal funding arrangements to emphasise risk mitigation rather than relief and recovery.

It wants the Federal Government to increase mitigation funding to states and territories to $200 million a year from $40 million, placing the onus on them to manage risks, while reducing funding for disaster relief and recovery to 50% of cost-sharing from the current 75%.

The commission believes generous federal funding creates a disincentive for state, territory and local governments to invest in mitigation and insurance.

It wants local governments to share the cost of rebuilding after disasters.

“Instead of being an ‘insurer of last resort’… the Australian Government has become the ‘insurer of first resort’,” the report says.

The Local Government Association of Queensland (LGAQ) says the prospect of councils having to take out disaster insurance for assets is “alarming”.

The commission proposes local councils pay the first $2 million for post-disaster reconstruction before qualifying for relief funding. The present threshold is $250,000.

LGAQ spokesman Craig Johnstone says small councils in Far North Queensland would have been liable for at least $8 million over the past four years.

He says combined insurance premiums for councils in north Queensland would be in the “hundreds of millions” to cover for flood, cyclone and storm damage “given their frequency and ferocity”.

“There’s an assumption that insurance can cover the [funding] gap, but that’s not the reality,” he told insuranceNEWS.com.au. “For smaller councils it’s just not viable. They have a small rates base. To adequately cover those assets would become an intolerable financial burden.”

The commission says state, territory and local governments “generally have adequate insurance for their non-road assets”. However, only the Victorian and ACT governments have insurance for main road assets, leaving “the vast majority of Australian roads” uninsured.

The Australian Local Government Association says 80% of the nation’s roads fall under local government jurisdiction.

The commission report says some state, territory and local governments argue it is not possible or cost-effective to insure roads, and recommends they consider “non-traditional insurance products” such as index-based insurance and catastrophe bonds.