Policies that discourage private adaptation decisions and distort premium pricing like the cyclone reinsurance pool should be avoided, the Productivity Commission says in a new report, warning such actions will result in “adverse” effects because of growing climate risks.

The report also urges the Government to consider setting a medium-term timeframe for the phase-out of the reinsurance pool to give private insurance providers enough time to secure alternative reinsurance services.

“Relative changes in insurance premiums play an important systemic role in helping households and businesses understand the climate risks that they face,” the government’s independent research and advisory body says in the report.

“While rising premiums are undesirable for individual households and businesses, they will be able to identify when high insurance premiums render unviable a proposed investment (either the addition to an existing structure or development of a new structure), or more generally reduce an investment’s commercial feasibility.”

The Productivity Commission says government “interventions” in private insurance markets risk subsidising the movement of individuals, households, and businesses into “harm’s way”, and increasing overall adaptation costs.

“Australian governments should avoid expansion of climate-related insurance sector intervention,” the report says.

The Advancing Prosperity report – part of the government body’s five-year inquiry into the country’s productivity performance – proposed 29 reform directives drawn from 71 separate recommendations.

The report backs axing stamp duty on insurance premiums as part of its proposed review of Australia’s risk protection system. It says such a move could lead to incremental gains in the near-term.

On climate risks, the report says increasingly detailed climate projections will be important in helping insurers accurately price climate risks over the years ahead.

“An inability to accurately price physical climate risks may lead private insurers to stop offering insurance products that cover the effects of particular climate events in particular regions altogether, being unable to judge whether they are taking on an acceptable level of risk,” the report says.

Click here for more from the report.