The Financial System Inquiry has called for more information on underinsurance levels in general insurance, amid fears technological developments in risk pricing could worsen the problem.

“The information available on the extent of underinsurance is limited, including no agreed measure of what level of insurance is desirable,” the inquiry’s interim report says.

“Further evidence beyond that already in submissions would be welcomed.”

It wants comparisons between Australia and other countries, more data and evidence on the implications of “more granular” risk-based pricing and strategies “if warranted”.

The inquiry says technology could reduce insurance pooling, with more specific pricing reducing some premiums while raising others, or leading to coverage withdrawal.

“Product issuers who fail to use better information to differentiate risk will be exposed to adverse selection.

“They will be more likely to acquire high risks, while more sophisticated competitors will attract lower risks at lower prices.”

The report says risk-based pricing can also provide important price signals to consumers, which may encourage mitigation.

But rising costs after natural disasters contribute to underinsurance in cases where customers may have thought they were adequately covered.

The cost of home building insurance as a proportion of annual income has grown significantly since 2008, while motor vehicle and home contents cover has remained broadly static since 1997, according to the report.

“Underinsurance may occur for a number of reasons including personal choice, behavioural biases, affordability and lack of adequate information or advice on the level of insurance needed.”