Insurers have called for an overhaul of disaster funding, to give communities stronger signals about taking on risk.

Submissions to the Productivity Commission review of disaster funding urge a switch in focus to mitigation rather than post-catastrophe relief.

“Australia is allowing more brittle and expensive assets to be constructed in locations where natural hazards have historically occurred, and in most cases there is limited recognition by government of the potential for those hazards to cause significant economic loss to the assets,” the Insurance Council of Australia says.

It submission says states should have to contribute to the Natural Disaster Relief and Recovery Arrangements on the same risk-pricing principles used in insurance, to encourage them to address hazards. States that claim more should have to contribute more to mitigation costs or take action to cut risk.

IAG says significant recovery payments may discourage investment in mitigation and reduce incentives to take up insurance.

Its submission says the insurance industry can play a greater role in community risk management – including land use planning – and potential impacts on premiums should be part of this analysis.

“This will help the community make an informed choice, understanding the trade-offs for living in particular areas.”

Many people underestimate threats, IAG says. In NSW 40% of NRMA customers have opted out of flood cover, despite facing risk, “sometimes for a saving of as little as $50 a year”.

Rising population density and a preference for living on the coast are producing higher disaster costs. The value of buildings and contents is rising, while building standards are often poor.

IAG says technological advances let insurers price to individual properties, and premiums may send the only signal to owners about their risk levels.

Suncorp calls for a mitigation program that is “co-ordinated, national and multifaceted” rather than haphazard and incoherent.

It says state and territory governments should establish centralised advice and support services to help local government overcome funding and expertise challenges.