QBE Australia has been taking some media heat over the past week from builders who say they are facing premiums up to three times higher than previously for their builders’ warranty insurance (BWI).

Reliable sources have told insuranceNEWS.com.au that the media’s details of the premium rises are debatable and some of the quoted cases are extreme. But the critics’ angst nevertheless can’t be ignored – it’s been there for a long time now.

BWI has been the subject of at least 56 official state and federal inquiries – most recently by the Victorian Legislative Council’s Standing Committee on Finance and Public Administration, whose report was released on Thursday last week.

Despite the airing of so many disparate views and endless stories of uncompleted jobs and feral builders, BWI remains a difficult and divisive product. The Productivity Commission has described it as a “running sore”, and the consumer advocacy group Choice refers to it as “junk insurance”.

Insurers have been struggling to get the risks associated with BWI under control for nearly 20 years. Their level of success can best be judged from the fact that in NSW and Victoria – the two biggest housing markets – every underwriter has abandoned the BWI ship.

The NSW and Victorian governments have accepted the inevitable and brought the underwriting of BWI under their self-insurance arms, with QBE acting as their agent. Only Tasmania has decided to axe BWI completely.

As QBE’s Executive GM Intermediary Distribution Colin Fagen noted with some irony at a hearing of the Victorian parliamentary inquiry: “When you see a number of insurers vacate a market, it would not be because they are making excess profits.”

He told the inquiry industry “scuttlebutt” suggests that other insurers abandoned the builders’ warranty market because of losses and the battering their reputations were taking.

“Some [insurers] were making a loss for a prolonged period and probably could not see the opportunity to gain appropriate returns,” Mr Fagen told the inquiry. “There is a volatility in this product.

“[It] can appear to be profitable for a short term but then can have significantly large individual losses that really clean out the premium pool.

“If we look in Victoria and go back over the last 20 years, we have seen some significant builders go into insolvency, and the claims they had would have added up to more than a year’s premium for the entire market, let alone one insurer.

“I think also… there is a degree of reputational risk in this product with insurers. There is a lot of criticism of the product at times because of the way we have not be able to get the community to understand the product properly. That is a factor that insurers do tire of at times.”

Advocates for various builders’ organisations feature prominently in last week’s Victorian parliamentary inquiry report, and their comments illustrate just how far apart the stakeholders’ views remain.

But building industry sources contacted by insuranceNEWS.com.au say last week’s media reports and some special interest advocates are exaggerating the scale of the BWI problem and the level of its unpopularity among builders.

Despite the variety of views, the Victorian inquiry report brings the scheme back into focus by noting that it’s the consumer whose interests should be front and centre in the debate.

For starters, there’s the actual name of the thing. The report says the nature of BWI isn’t well understood, and that the use of the word “warranty” adds to the confusion.

The Housing Industry Association’s Victorian Director Gil King told insuranceNEWS.com.au people think they are getting a product that provides a warranty against defective work. “It’s not; it’s a last-resort protection confined to covering people against their builder dying, going broke or disappearing.”

Then there’s the call by consumer groups and some of the builder advocates for a “first resort” scheme, under which consumers would be able to claim for repairs while the builder is still in business. Queensland runs a first resort scheme, but such a scheme isn’t likely to win advocates from the insurance industry.

The inquiry report notes the lack of data to assess all of the costs and benefits of a first resort scheme in Victoria, and calls on the State Government to undertake a comprehensive cost/benefit analysis of such a scheme.

“The analysis should include consideration of whether the Government could incorporate a risk-based approach to premiums into the scheme, together with incentives to resolve claims,” it says.

Whether a first-resort scheme would eliminate the major bugbear of aggrieved consumers – the legal and bureaucratic hoops they have to go through before they can make a BWI claim – is open to question.

The report also calls on the Victorian Government to “review the enforcement policies of regulatory agencies in the building industry to ensure appropriate priority is given to enforcing builders’ legal obligations”, and that complaint-handling agencies in the building industry “develop and publish key performance indicators for responding to complaints from consumers”.

Until state governments get the basics of consumer redress right and build better understandings of what BWI is actually designed to do, it seems it will remain an untouchable Cinderella product.