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26 May 2013
The slow march to abolish inappropriate taxes on insurance continues, with the NSW Government launching a three-month consultation on reforming collection of the state’s Emergency Services Levy (ESL).
The Government has committed itself to change, with Treasurer Mike Baird saying NSW needs a “better, fairer and more efficient” system.
It is considering options for a property-based levy and how to introduce it in a manner that avoids consumers being levied twice during the transition, on both their insurance premiums and council rates – as is likely to occur in Victoria.
A Government discussion paper says an abrupt transition on July 1 2014 could disrupt the insurance industry.
“An abrupt replacement of an insurance-based system with a system based on land values could cause some households and businesses to delay renewals on their insurance until the insurance levy is abolished,” it notes.
Taxes on premiums contribute 73.7% to funding Fire and Rescue NSW, the State Emergency Service and the NSW Rural Fire Service, or about $763 million plus $63 million in stamp duty.
The Insurance Council of Australia (ICA) estimates the levy adds on average $105 to residential premiums, $666 to commercial and $218 on rural consumers, with 10% GST and 9% stamp duty on top.
But a study commissioned by ICA has found that while residential insureds will save from a move to a property-based levy, many commercial and rural consumers will incur a net cost.
The Government discussion paper says that in 2011/12, ICA recommended members increase gross premiums by 40% for most commercial insurance, 23% for household insurance and 1% for vehicle insurance to cover the ESL cost.
Insurers can, of course, choose not to adopt the recommendation, and ICA says most do not charge the levy on motor premiums.
Insurers are allocated an ESL amount in proportion to their market share and then calculate the amount to be added to policies. Ninety-four insurers collect the ESL, although five groups dominate the market.
If ESL on insurance is dropped, the Government is likely to ask the state’s Independent Pricing and Regulatory Tribunal – which four years ago called for the insurance-based levy to be abolished – to monitor premiums to ensure consumers get reductions.
The discussion paper says a property levy could save the average household with building and contents insurance about $250 a year, although ICA’s study calculates the saving as much less.
NSW has the highest proportion of households without contents insurance of any state, with about 64% having contents insurance compared with 74% nationally. The paper says the rate of insurance was declining in WA until the state abolished its insurance-based fire services levy (FSL) in 2003, and has plateaued since then. Insurance take-up has risen in SA since that state dropped its FSL in 1999.
The consultation canvasses whether property-based charges should differ between commercial and residential and between city and rural dwellers, and whether an amount should be raised via motor vehicle registrations.
If a fee-for-service approach is used, about 17% of NSW’s emergency services might be funded through vehicle registrations, as they account for this proportion of callouts.
Business contributes 49% of the ESL via insurance, householders 45% and rural policyholders 6%. If this were changed to a flat rate on property, householders would contribute 80%, business 10% and rural policyholders 10%.
ICA commissioned Deloitte to model variations of three alternatives: a flat rate charge, a service-related rate based on land value and property type and a rate based on fire risk.
The council says that under all the scenarios, there would be a saving to the average insured residential property across NSW, but the average insured commercial and rural property owner would incur a net cost.
“Because property values and insurance premiums differ by the location and type of property, not all insured property-owners in all areas are ensured positive net savings,” the report says.
The study concludes that none of the three scenarios presents an obvious choice for a future property charge.
It says the increased contribution of uninsured property-owners is less than the decreased contribution of insured owners, but notes that insureds not only pay higher premiums due to the levy but also a higher rate of GST and stamp duty and would save on that.
It says that under a flat rate levy based on land value and property type, the average residential property would save $41 a year but the average commercial property would incur a $502 net cost and the average rural property $219.
Under a variable rate levy, again based on property value but varying between regions, residential consumers would save on average $33 a year, commercial properties would incur a $479 net cost and rural properties a $147 cost.
Deloitte’s calculations assume that commercial owners would contribute the same proportion of ESL as now, while examples in the Government discussion paper assume the business contribution would fall as more households join the collection.
Under a risk-based rate, homeowners would save $38, commercial insureds would incur a $591 net cost and rural insureds would pay a net $676 a year.
NSW is following Victoria in moving from a levy on insurance to a property-based tax.
The move will leave Tasmania as the remaining state with an FSL levy on insurance. This contributes 30% of the state’s emergency services funding, with the rest coming from local governments and vehicle registration.
All other states and territories have a property-based tax except the NT, which funds its services from consolidated revenue.
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