Insurance affordability and availability risks are set to rise with more intense and frequent natural disasters, strengthening the economic case for greater investment in mitigation, Australian Prudential Regulation Authority (APRA) Executive Board Member Geoff Summerhayes says.

“Countries with larger insurance protection gaps typically suffer more severe economic consequences after disasters, such as reduced productivity and higher debt levels,” he told the Australian Business Roundtable for Disaster Resilience and Safer Communities webinar last week.

“With its mandate to protect the soundness of financial institutions and broader financial stability, APRA is understandably keen to avoid such a scenario coming to pass.”

Insurers facing the prospect of higher claims costs have the advantages of contracts that are renewed annually and an increasingly sophisticated ability to measure the risk faced by individual policyholders, he said.

“This might be good for insurers, at least in the short term, but it’s bad news for policyholders and economic activity more broadly,” he said.

“APRA’s biggest concern when it comes to the impact of climate-related risks on insurance is therefore not the prospect of an insurer becoming insolvent, it’s the possibility that general insurance might become unaffordable or even unavailable in parts of Australia.”

Mitigation is the best way to tackle the issue, APRA says in a submission to the Australian Competition and Consumer Commission’s Northern Australia Insurance Inquiry, and Mr Summerhayes warned the webinar audience that the issue may affect more regions as the climate changes.

“Other approaches, such as subsidising the cost of insurance, will ultimately be less effective because they don’t lower the risk and may reduce the incentive to mitigate it,” he said.

Mr Summerhayes says responsibilities lie with governments, households and businesses, while insurers can also do more to incentivise mitigation.

“If insurers want their argument that lowering the risk lowers the premium to be taken seriously, they must do more to recognise mitigation by home and business owners and reward it accordingly,” he said.

The Australian Business Roundtable predicts the total economic cost of natural disasters to the country will reach $39 billion a year by 2050, while in the US it is estimated that every dollar spent on resilience saves up to $11 in response and recovery costs.