The Insurance Council of Australia (ICA) has warned against moves to require total replacement policies for home cover as part of wider reforms to protect consumers.

“Mandating total replacement policies could have serious implications for insurance affordability,” it says in a submission to Treasury. “Further, it could significantly undermine the economic viability of individual insurers, as well has having broader economic impacts if a large-scale natural disaster were to occur in Australia.”

The Federal Government has released a discussion paper on proposed measures to reduce the risk of consumers buying unsuitable financial products.

The issue was raised by the 2015 Financial System Inquiry, which recommended new accountability obligations for groups that issue or distribute financial products.

It also proposed product intervention powers for the regulator.

ICA says commentary around the reforms has included suggestions that insurers provide replacement cost cover for homes, rather than sum-insured policies. The suggestion is “an example of how the product design obligation could be applied inappropriately”, it says in its submission.

It says any legislative product design and distribution obligation must not interfere with insurers’ ability to prudently underwrite risks.

“Undermining underwriting integrity could have devastating and destabilising impacts on the insurance industry, the costs of which will ultimately be borne by consumers.”

ICA calls for transparency around the reasons for product intervention by the regulator and a “sufficiently high” threshold for action, while also urging the Government to facilitate innovative forms of disclosure, as recommended by the Financial System Inquiry.

“Focusing efforts on ensuring effective disclosure and clear consumer understanding will lead to far better outcomes for all stakeholders than will be achieved through complex and overlapping regulatory burdens,” it says.