A federal parliamentary inquiry has questioned the protection available for consumers buying house and contents cover from unauthorised foreign insurers (UFIs).

And Australian Prudential Regulation Authority (APRA) Deputy Chairman Ian Laughlin has admitted the regulator is “not keen on this idea”, which has been pushed by Finance Minister Mathias Cormann to increase insurer competition in north Queensland.

Labor MP Ed Husic pointed out to Mr Laughlin that foreign insurers are already able to write cover, so “why aren’t they writing home insurance on a larger scale now?”

He asked if APRA has warned the Federal Government about the lack of protection for consumers buying insurance from UFIs.

Mr Laughlin told the House of Representatives Standing Committee on Economics inquiry into APRA’s annual report there are restrictions on how UFIs can operate.

They must deal through brokers and they can only cover risks that cannot reasonably be placed in Australia, or risks for which terms including price are substantially less favourable to the insured when buying locally.

“One of the underlying points here is: why would a UFI offer cover that, in other respects, is equal at a lower price than a local insurer?” Mr Laughlin said.

“Why would a sensible UFI offer cover at a lower price? It is pretty unlikely.”

He says a UFI from a jurisdiction with lower capital requirements than Australia might take a greater level of risk than a local insurer, but that comes at a price because the security of the policy is lower.

This prompted Mr Husic to question whether such a UFI would be able to pay claims.

Mr Husic, whose Chifley electorate covers western Sydney, says he is concerned about insurance affordability because of developments in areas that have previously been classified as flood-prone.

Mr Laughlin says APRA is a financial regulator and notes the UFI plan, aimed at increasing competition in the north Queensland insurance market, is about avoiding financial regulation.

“At first blush, we are obviously not keen on this idea. The Government also is grappling with these sorts of problems.”