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State governments continue to gouge insurance-buyers, 18 May 2009

Victorian and NSW policyholders have been belted with yet another rise in the fire services levy (FSL), pushing up the cost of their premiums and further increasing the risk of underinsurance.

As if the recent Victorian bushfires aren’t a lesson on the prevalence of underinsurance, particularly in regional areas, the two state governments risk making the problem even worse.

Rural and metropolitan home and business owners in Victoria and NSW will now pay from an extra one to five percentage points of FSL on top of their insurance premium.

In country Victoria, businesses have been hit with a five percentage point increase on top of a five percentage point rise in early February. They will now pay a monstrous 68% on top of their premium, as well as 10% GST and 10% stamp duty on top of that.

This means they will now pay more than $1 in tax for every $1 in premium.

The revelation that state taxes are increasing for the second time in three months comes just a week after the Victorian Government announced a record $215.5 million increase in its budget for emergency services.

The insurance industry hasn’t had to wait long to find out where the bulk of funding for this massive increase will come from.

The Victorian Government’s budget increase is intended to improve communications and fire-fighting equipment ahead of the next bushfire season.
But by raising taxes and potentially increasing underinsurance, the Government is taking the financial burden away from insurers and onto themselves.

The Government has copped the bill as uninsured bushfire victims try to recoup their losses. The issue of underinsurance and non-insurance came to the fore immediately after the bushfires, with public and media debate on the justice of rebuilding the homes of people who had done nothing to insure them.

But it seems these state governments will not learn their lesson. When the FSL was taken off insurance in WA in 2003 and put on to council rates, non-insurance dropped significantly in line with lower tax collections on premiums.

Allianz spokesman Nicholas Scofield told the increase in the Victorian levy will add to the issues of affordability, non-insurance and underinsurance.

“This doesn’t even take into account increases in resources for fire services that may come out as a recommendation of the Victorian Bushfires Royal Commission,” he said. “So you can hardly imagine what the potential levels of FSL could be.”

He says the continued increase in FSL will only stop when fire brigade budgets either stabilise or fall, which is unlikely to ever happen.

“The nature of the insurance-based funding mechanism doesn’t lend itself to a lot of transparency and scrutiny and control of fire brigade budgets.”

NIBA CEO Noel Pettersen – whose organisation has been at the forefront of the tax battle over the past 10 years – says the insurance industry is becoming used as a tax collector for state governments.

“Our reaction to the latest rises is obvious dismay,” he said. “There’s no other place on earth where you pay more for taxes and charges for every dollar you pay in premium.

“It defies belief that in these tough times they could increase it even further.”

The response of Ballarat broker Damien Edwards of Garden State Insurance Brokers to the increases is typical of those within the industry. He’s frustrated that tax increases on premiums happen without much public attention, and believes the Victorian Government should be promoting insurance for everyone.

He says it’s very difficult for him as a broker to encourage clients to insure risks correctly when the state government keeps increasing the taxes on premiums.

“People just don’t realise the taxes that are applied to their policies,” he said. “They look at their premium increases and assume that the insurer’s rates have gone up, but they don’t understand that it’s a government charge that has increased. If we had more public awareness, that would put more pressure on the Government.”

Last week NIBA began issuing tens of thousands of copies of a “discussion paper” to brokers to pass on to their clients. It is intended to raise insurance-buyers’ awareness of the problem and urges policyholders to lobby their MPs for change.

Mr Pettersen says the discussion paper couldn’t be more timely – even though the latest rises will have to be added to the papers as they are distributed.

“We need the public – the insurance-buyers – to be making a noise about this, to make politicians sit up and take notice,” he told “Otherwise the industry will just continue to be a cash cow.

“The governments keep doing it because it’s so easy for them. It’s over $5 billion in taxes. Every time you need more income, this is the easy way to do it – because there aren’t protests about it.”

The issue is now starting to get more traction, particularly as the royal commission gains headwind. The industry is holding its breath that the obvious connection between affordability and the cost of insurance will be made.

Until that time, just who will cover the losses the next time summer fires wipe out underinsured properties – the insurance industry or the state governments – remains to be seen.