Taxing deductibles. Industry groups join insurers and brokers to protest Victoria’s latest attempt to squeeze even more money out of property insurance
Insurance & Risk Professional, August 05
Less than two years after it held a dubious internal review into premium-based fire services funding, the Victorian Government is trying again to suck more money out of policyholders. The State Emergencies Bill, introduced into the State Parliament without consultation with the insurance industry or other industry groups, aims to tax companies which carry deductibles on their property policies of more than $10,000.
The bill, which is now the subject of intensive lobbying by major industry groups, was described by Emergency Services Minister Tim Holding as a bid to “improve equity” within the fire services levy (FSL) system.
The content of the bill – and the casual manner in which it has been handled by the State Government – has been attacked by industry organisations, which have joined the Insurance Council of Australia (ICA) and NIBA to demand further consultation.
Under the current fire brigade funding system – which the industry wants switched to a more equitable land rates-based method that would be collected by councils – Victoria’s fire services are largely funded by levies paid by insurance companies, who in turn pass that cost on to their clients.
Victoria already has the highest insurance taxes in the world, and companies that self-insure through deductibles are already paying up to 86% of their premium in taxes.
The bill will see large corporates who self-insure or who only pay insurance premiums on a portion of their assets facing exorbitant tax hikes.
In a letter to Mr Holding, NIBA Chief Executive Noel Pettersen says the Victorian Government itself uses large deductibles for its own insurance-buying arrangement, so “it clearly supports the legitimate use of deductibles”.
Mr Pettersen also pointed out that a recent NIBA survey showed an increasing proportion of SME businesses in both the metropolitan and country districts are electing to assume more risk to their own account.
“This assumption of risk is to be commended because it signifies a growing confidence in the risk management practices incorporated into a business.”
He says the proposed change in legislation may “significantly impact the overall cost of funding risk for major corporations operating in Victoria” and undermines the whole intention of risk management programs – “to retain as much risk in-house as is economically sound”.
Provisions in the new bill require insurers to provide details of commissions and discounts on premiums, and a notional premium for deductibles of $10,000 or more.
While NIBA recognises the need for adequate funding of the state’s emergency services, Mr Pettersen says the Government is portraying that cost as “a sole responsibility of insurers, which is no longer seen as being factual by those ultimately paying the charge”.
Mr Holding says property-owners with large deductibles do not make a fair contribution to the fire services budget.
The State Government has long argued that fire services levies are not taxes. It is now stretching the definition a bit by describing self-insurance as a means of evading tax.
Peter Jamvold, ICA’s Regional Manager for Victoria, South Australia and Tasmania, criticised the “credibility” of the 2003 Treasury review’s conclusions and recommendations, on which the bill is based.
He told Mr Holding the bill cannot redress “problems of inequity, inefficiency and lack of transparency because these are inherent in the FSL scheme”.
The proposed measures would provide questionable sustainability regarding fire services funding because of the “combined effects of penal FSL rates and the increased incentive of tax avoidance”.
In a detailed critique of the Government’s 2003 internal review of the FSL, ICA says the Victorian Government has not addressed the principle of equity or the problem of tax avoidance in its current FSL model. Its new deductibles provision creates “significant hardships for insurers and their commercial customers”.
The 2003 review is regarded with disdain by industry groups because it was announced just before an election – effectively halting community and industry groups’ efforts to make it an election issue – and was then conducted completely within the State Treasury, which refused industry assistance to model alternative systems.
The review looked at the equity and efficiency of the system and stated that those who “benefit from the FSL should fund the cost of its provision”. It said a “close alignment of funding and benefits also encourages those generating fire risks to recognise and manage them”.
Both Mr Pettersen and Mr Jamvold have pointed out that the deductibles provision in the bill illustrates a simplistic understanding of what a deductible is and what it does.
Mr Pettersen also voiced strong opposition to the deductibles provisions on the grounds that they undermine the enhancement of risk management. By making tax implications a determining factor in the construction of a policy deductible, the provisions ultimately discourage the acceptance of risk exposure by big companies, and “directly penalise risk management”.
Both the ICA and NIBA plainly do not believe the bill has addressed the objective Mr Holding defined at its second parliamentary reading – to improve “the transparency and equity of the current insurance-based funding system”.
Mr Pettersen says the bill’s requirement for insurers to fund a significant proportion of the overall cost of the metropolitan and country fire services undermines the aim of equity, while transparency is “even further clouded”.