Insurance affordability problems could worsen if general insurers are forced to financially support the troubled Compensation Scheme of Last Resort, the industry warns.

The Insurance Council of Australia is concerned reform options featured in a Treasury consultation paper do not address the “root causes of consumer harm” that contributed to the scheme’s funding shortfall.

The scheme does not cover general insurance, but the industry has already been made to contribute to a $47.3 million special levy to plug a 2025-26 deficit caused by a blowout in investment-related claims.

A special charge is again expected in 2026-27 after the scheme operator projected the CSLR faces another deficit.

“General insurers do not give rise to the types of in-scope losses driving CSLR costs, and consumers are not eligible to access the CSLR for general insurance complaints,” ICA says in a submission to Treasury.

“Any increases in operational costs, especially to those costs not directly related to the provision of general insurance, risks exacerbating Australia’s insurance affordability pressures.”

ICA says the scheme’s “funding pressures are a symptom of deeper structural and regulatory weaknesses.

“Without addressing these root causes of consumer harm, reforms focused primarily on funding mechanisms risk simply shifting long-term costs onto the broader financial services customer base.”

The scheme’s special levy mechanism is a “temporary Band-Aid, and not a sustainable solution”, ICA adds.

Financial services subsectors responsible for misconduct that causes consumer losses should pay for the special levy, it suggests.

This “fairest approach” should be “supported by reforms that ensure firms can meet their obligations in the first place”, ICA deputy CEO Kylie Macfarlane says.

The CSLR provides an avenue for people who have won determinations from the Australian Financial Complaints Authority that remain unpaid due to financial services businesses going into liquidation.