Heated argument: The question of who should fund fire services is back on the agenda
Insurance & Risk Professional, June 2007
The fire services levy is the cross the insurance sector hates to bear, deriding the impost as anachronistic and unfair.
The Victorian Government does concur on that last description, but as for fixing it the respective camps are at opposite ends of the debate.
Victoria, one of three states to retain the tax on insurance, is planning an increase for certain commercial property premiums. Policyholders at the higher end would contribute more.
This has produced quite a reaction from underwriters and brokers still angry over the Government’s refusal to abolish the fire services levy (FSL) in 2003. They are using the proposal to revive their assault on the FSL.
In a regulatory impact statement quietly released in April, the Victorian Government is proposing a higher contribution rate for premiums on buildings valued at more than $50 million.
At present, the levy on such commercial policies means an annual windfall of $37 million for the Government. When the Fire Service Fund Contribution is raised from 4.3% to 4.9%, the total will be $41.8 million.
The reasoning behind this adjustment is run on equity lines. In 2003, the Government identified what it described as a weakness in the system – users of deductibles did not adequately contribute to funding fire services.
The Government argues policyholders with a higher total insured value(TIV)are effectively under-contributing to the scheme because their fire risk comprises a higher portion of the building’s total risk.
In the Government’s words, owners are less likely to insure larger buildings against other risks such as theft and accidental damage.
Although positioned as improvements to the system, the changes are largely cosmetic, costly and, the insurance industry argues, of little overall benefit.
To redistribute about $2 million in a funding pot of $856 million will cost the industry about $5.5 million in immediate implementation costs, with ongoing compliance costs of $300,000.
In NIBA’s submission, Chief Executive Noel Pettersen questioned the assumption that higher TIV policyholders should pay more.
“Whether an insurance policy covers risks other than fire is just one of a number of factors that should be taken into account when considering the question of the equity of the fires services levy,” he wrote.
The Insurance Council of Australia (ICA) generally supports the new arrangements but says the benefits will be marginal at best.
“If the policy intention is to introduce greater equity in fire contributions, then a redistribution of some $2 million is not considered to be a significant adjustment,” Chief Executive Kerrie Kelly wrote in ICA’s formal submission.
But at the heart of the industry’s frustration with the Government is the FSL itself.
A 2001 Victorian state business tax review found the levy was a disincentive to taking out cover, and the HIH Royal Commission recommended abolishing levies on insurance.
But after the Victorian Department of Treasury examined funding arrangements in 2003, the Government backed the levy as the best way of matching contributions with benefits.
“The review did not provide compelling arguments for adopting an alternative funding model,” Treasurer John Brumby said.
“In fact, it found a property levy would lead to major redistribution of funding, higher administration costs and a disincentive to manage risks.”
Arguments over costs, disincentives and funding aside, the Victorian Government basically doesn’t trust the insurance sector to make good on its promises to pass on savings to consumers.
One of the repeated themes of industry is that high premiums are a disincentive for consumers. By removing the levy, underinsurance would dissolve as premiums fell.
Treasury didn’t buy this argument, stating there was no guarantee prices would fall once the levy was axed. But from the Western Australian experience at least, Treasury is on shaky ground.
An independent report by Sigma Plus in 2004 – two years after the WA levy was replaced by a broader tax – found the move had led to lower premiums and more people taking out cover.
The cost of home and contents cover fell about 13% and commercial property 15% in the year after the levy was lifted.
“The evidence shows that the insurance industry has passed on the FSL savings to consumers,” Sigma Plus said. “This is despite extra costs to insurers that are specific to WA, such as higher claim costs and the extra cost to insurers of complying with the new FSL regime.”
The sector’s other repeated assertion that fire services are funded by the few to provide cover for all is also dismissed by the Victorian Government as unreliable. ICA puts underinsurance Australia-wide at roughly 20%, but the Government says the real figure is closer to half.
Until there is a change of heart – or government – the fire services levy in Victoria seems to be entrenched.