Consumers lack the information needed to make informed choices when buying or renewing insurance cover, Legal Aid NSW has told the Financial System Inquiry.

It calls for a suitability test for insurance, introduction of unfair terms to insurance contracts and better protection for consumers buying “add-ons” at point of sale.

Legal Aid says while the industry is enjoying peak profitability, “it is questionable whether the current insurance market is safe for consumers”.

It raises concerns about funeral insurance, products tailored to Aboriginal communities and cover marketed on television to elderly people.

The group’s submission also flags “rubbery terms” in life and general insurance, plus claims handling and disputes.

It says last year’s Blue Mountains bushfires revealed many consumers had underinsured for rebuilding because construction codes for fire-prone areas had been upgraded. About 61% of consumers relied on the insured sum nominated by insurers when renewing cover.

Legal Aid warns recent disasters have highlighted a lack of useful information available to consumers, while insurance reform has focused on technical and legalistic issues rather than the suitability and fairness of insurance as a financial product.

A suitability test would prohibit the sale of products that represent gross underinsurance, or would at least warn against underinsurance in home and contents cover.