The Need for Change
The National Insurance Brokers Association (NIBA) welcomes the Victorian Government’s announcement of a Review of the current funding of fire services through a levy on insurance.
Taxes and charges on property insurance in Victoria are extremely high. The rate of fire services levy for Victorian country commercial insurance is 84% of the basic insurance premium. When GST and stamp duty are applied the total taxes and charges are a staggering 123% of the basic premium.
These extreme rates of taxation drive normally prudent people away from insurance.
Clearly there is in Victoria a very large section of the public that do not protect their property by insurance. Not only do these people risk financial ruin and are a burden on the Government but they do not make an appropriate contribution towards the funding of fire services in Victoria.
Their fair share of the contribution to funding the fire services is picked up by those that do insure their property.
Significant Change to the Existing Arrangement is Needed
NIBA is also pleased that a pilot study is soon to be undertaken of the levels of non-insurance and under-insurance in Victoria. The personal tragedies that have result from non-insurance and under-insurance following the Black Saturday fires are becoming increasingly obvious to all.
The more that can be done to increase understanding of the extent and the reasons for non-insurance and under-insurance the better the community will be at tackling this very real problem.
While NIBA supports the Review it is concerned about a number of statements, errors and omissions in the Green Paper that was released by the Victorian Treasurer on 30 October 2009.
The Green Paper outlines a number of options for reform. It states, however, that the Government’s preferred option is a continuation of the existing system for funding fire services by way of a levy on insurance.
It is important that the Review be conducted in an independent and professional way and not simply be used as a way of justifying the current arrangements. In this regard NIBA has noted a number of misleading or important omissions from the Green Paper, including:
- The interpretation in the Green Paper of the 2003 Department of Treasury and Finance Report on the Review of Fires Services Funding.
- A misunderstanding of the link between the risk of fire and fire services contributions payable by the individual.
- Confirmation that in reality the fire services contribution falls on insurance policyholders and not insurance companies.
- The method of determining under-insurance in the pilot study.
- The failure to consider the implications of GST and stamp duty paid on policyholder contribution and Government Revenue.
The 2003 Treasury and Finance Study
The Green Paper relies heavily on the 2003 Review by the Department of Treasury and Finance for the view that the current insurance based funding system for fire services be continued.
The Green Paper states that the 2003 review found “the current model was the best way to fund Victoria’s fire services.” This statement appears to NIBA to misrepresent the 2003 review’s report.
The Department of Treasury and Finance Report drew no firm conclusions as to a preferred model nor did it make any recommendations.
NIBA also believes that the Green Paper should also refer to other recent studies such as the 2001 Review of Victorian State Businesses Taxes, the 2008 NSW IPART and the HIH Royal Commission all of which were highly critical of the current system, stating that it was inequitable and recommending that it be replaced.
NIBA would like the proposed new review to be open, transparent and rigorous.
The Green Paper suggests that a strength of the insurance based funding model is that the fire services contribution reflects the fire risk for those that are insured. The proposition being put here is that the fire services contribution is based upon premium and as premium reflects the fire risk there must be a direct relationship between the fire risk and the fire services contribution. Such a proposition is a gross over simplification of reality and is inconsistent with the way in which the property insurance market works.
Premium setting is a complex matter and involves far more than a consideration of the risk of fire. Individual premiums can go up or down without there having been any change in the perceived fire risk.
The premium (and hence the fire services levy) in relation to similar properties with the same fire risk can, and does, vary significantly.
When people insure their property they generally seek protection for a wide variety of risks and not simply fire. Other types of risks include, earthquake, explosion, accidental breakage, impact damage, lightning, oil – leaking or escaping, riots, civil commotion, terrorism, storm, water leaking or escaping, flood and most importantly, theft or attempted theft.
In setting premiums insurers have regard to all the risks covered by the policy, and not simply the fire risk, together with a host of other factors. As a result the link between premium and fire risk is often very tenuous:
- For example an insurance company could increase a policyholder’s premium following a recent burglary or series of burglaries. The increase in premium would automatically lead to an increase in fire services contribution even though there had been no change in the fire risk.
- Conversely, a premium discount offered by an insurer to those who increased security arrangements for their property would, if accepted, result in the fire services contribution being reduced independently of the fire risk.
- A completely different example of an individual’s premium varying because of a change in a factor other than the fire risk would be where an insurer offered a discount for having more than one insurance policy with that insurer. In this situation household insurance and the fire services contribution could both be reduced simply because the policyholder took out car insurance.
- It is an everyday occurrence for individual property premiums to vary as a result of factors other than the fire risk and in many situations fire risk is not the dominant risk covered by property insurance.
In Reality Individual Policyholders Pay Fire Services Contributions Not Insurance Companies
Insurance companies make their contribution to the funding of fire services in Victoria by direct payment to the Government. They then recover this cost by a fire services contribution from policyholders.
NIBA is not aware of any insurance company not recovering from its policyholders the amount it pays to the Victorian Government by way of fire services levy. It is reasonable to assume that any increase or decrease in the amount that insurance companies are required to contribute to the Government will be completely reflected in what they recover from policyholders.
Under-insurance is generally regarded as occurring when the sum insured is insufficient to enable full replacement of the damaged or destroyed property. “Replacement value” is different from the concepts of “Capital Improved Value” or “the value of the building structures” used in the Green Paper. “Replacement value” is the amount required to completely rebuild following the destruction of a property and includes all costs associated with the rebuilding.
People who had their homes destroyed by the Black Saturday bushfires would usually like to hold insurance that covered the completed restoration (replacement) of their home. “Market value” is usually less than the “replacement value”.
In order to determine the extent of under-insurance in Victoria it is necessary to compare sums insured against “replacement value”. Not an easy task, but a necessary one if the true position in relation to under-insurance is to be determined. Independent experts at valuing property will be required and it is suggested that those experts report to a committee made up of both Government and insurance industry officials.
GST and Stamp Duty
The Green Paper ignores some important monetary implications of having a fire services contribution paid by way of insurance. It ignores GST and Stamp Duty.
The Green Paper indicates that the fire services levy is expected to raise $510 million for the Victorian Government in 2009/10. The total financial implication of the levy on individuals is, however, far greater than that figure.
Policyholders will have to pay GST and Stamp Duty on top of their fire services contribution, something that would not be necessary if a move was made to property based fire services funding. Policyholders will be required to pay $617 million, made up of $510 million levy, $51 million GST and $56 million in Victorian stamp duty. A 21% increase on the figure used in the Green Paper.
The existence of taxes on fire services contributions means that the fire services levy raises in total significantly more for the Victorian Government than the $510 million levy figure used in the Green Paper. The Victorian Government receives $56 million in stamp duty because of the existence of fire services levy. It also receives some additional funds from the Commonwealth as a result of GST paid on the fire services levy contributions.
If a true assessment of the various options for funding fire services is to be made, then the implications of the existence of all taxes should be taken into consideration.
The equity issues involved in having GST and Stamp Duty apply to the funding for fire services should also be considered.
Timing of the Review
Submissions in response to the Green Paper from interested parties are not being called for until June 2010 with a closing date for submissions being 15 July 2010. In the meantime the Government will undertake the pilot study on non-insurance and under-insurance.
The Government will also take the opportunity to consider the final reports from the Bushfires Royal Commission and the Henry Tax Review prior to it releasing (towards the end of 2010 or the beginning of 2011) a White Paper outlining its final position.
While the process is a long one it is only reasonable that the Victorian Government take advantage of the information coming from the pilot study, the Henry Tax Review and the Royal Commission, prior to putting forward a detailed plan for the ongoing funding of fire services.
- NIBA supports the concept of the Review put forward in the Green Paper. It is appropriate that Victoria undertake a pilot study of non-insurance and under-insurance and that it again considers the appropriateness of funding fire services by a levy on property insurance.
- It is important that the pilot study and Review be undertaken in a professional, transparent and independent way. Independent outside experts should be engaged in all stages of the pilot study and the Review to ensure that the resulting reports are balanced and of a high standard and can be relied upon for effective decision making.
NIBA members (particularly in Victoria) should make these views known to their local MP and also advise their clients and business contacts. The insurance-buyer must demand change.