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27 April 2015
The end of a fire services levy (FSL) imposed on insurance policies in Victoria was supposed to be a good thing. Instead, it has turned into a nightmare that has seen the tax skyrocket, and is set to pit brokers against insurers before it is finally abolished on July 1 next year.
Due to capital investments in equipment and other improvements to the state’s fire services recommended by the 2009 Victorian Bushfires Royal Commission, the amount of FSL imposed on the insurance industry in Victoria has risen to $641.9 million this current financial year, up 18% on the $544.2 million raised in 2010/11.
That was itself a 30% rise on the previous year’s world record tax impost.
Now a failure in planning by the Victorian Government has led to inadequate time for a smooth transition from the insurance-based FSL to a more equitable levy based on property rates, which comes into force on July 1 next year.
The transition has already been delayed by one year, but that doesn’t appear to have been used by the government of Ted Baillieu to arrive at a solution that has any vestige of organisation or fairness about it.
With the transition year set to begin in just six weeks, the Government is yet to detail exactly how the transition will work, or what the new property-based tax will look like.
But it has ordered insurers to charge a full year’s FSL on annual premiums leading up to July 1 next year, a situation which is patently unfair on policyholders.
If they are acting in the best interests of their clients, brokers may well advise them – despite the accompanying administrative nightmare – to extend their current policies or buy shorter-term policies which only attract a proportional amount of FSL rather than a full year’s worth of the tax. The possibility of this happening is causing such concern to insurers that they are asking the Victorian Government to legislate against it.
Whether the Government would be prepared to assist in this way isn’t clear, but perhaps a greater cloud hangs over whether it has the political will.
After all, the possibility of policyholders trying to avoid paying the full FSL is of little consequence to the Government; it is the insurers who are responsible for paying the full sum of FSL owed, and it is up to each insurer as to how they pass on those costs in order to meet that obligation.
Early indications suggest that the political incentive to give the insurance industry a fair go is indeed absent. insuranceNEWS.com.au has learned that the Government even suggested insurers could account for any potential shortfall in FSL collected within Victoria by simply spreading the cost to policyholders around Australia.
A lack of confidence in the Victorian Government’s willingness to help the industry smooth the transition has some in the industry levelling criticism at the Insurance Council of Australia’s (ICA) say-nothing, behind-the-scenes approach to the problem.
Many believe the Government – which has a parliamentary majority of only one seat – could have been persuaded to a more reasonable course of action by increased public pressure, with the industry using the state’s media or even advertising to stir policyholder fury at the lack of fairness in the transition process.
Long-time FSL abolition campaigner Allan Manning says ICA has much to answer for the situation the industry finds itself in. “ICA should have been on top of this for our industry and more importantly for their members and the insuring public,” he said last week.
Professor Manning, MD of major loss management company LMI, wrote a blog post calling on ICA member companies “to question the value of their industry association”.
ICA GM Communications and Media Relations Campbell Fuller declined to comment on Professor Manning’s criticisms, instead reiterating ICA’s stance that it will assist the Victorian Government “in smoothing the transition and looks forward to seeing the legislation”.
The council will have to have much more than banal statements to bring to the table if it hopes to rescue the situation. Having obviously failed to influence the Baillieu Government thus far, it’s hard to know what ICA believes it can achieve now.
It seems brokers may be left to their own devices to explain the whole mess to their clients, and with broker outrage at the situation growing, Professor Manning is also critical of the National Insurance Brokers Association’s (NIBA) lack of action or meaningful comment on the issue.
As reported by insuranceNEWS.com.au last week, NIBA CEO Dallas Booth has done little more than state that like ICA, NIBA is waiting to hear from the State Government on the process for phasing out the FSL.
Professor Manning told insuranceNEWS.com.au the two associations “have let the industry down” and that NIBA “should be there as a representative and spokesman of the broker and the insured”.
As a result of all the uncertainty, QBE, Zurich and at least one other major commercial insurer have already revised their FSL charges upwards. insuranceNEWS.com.au understands some insurers will not allow a pro-rata FSL to be charged on policies which are extended until July 1 next year, while others are rewriting product disclosure statements to stipulate that in the event of policy cancellations the remaining premium on the policy will be refunded, but not the remaining FSL.
The FSL debacle also brings the issue of insurance affordability in Victoria into sharp focus. At a time when premium rates are increasing and many sectors of the community are doing it tough, the massive rise in the cost of the FSL will inevitably lead to increased rates of underinsurance and non-insurance as Victorian policyholders look to avoid massive charges by reducing levels of cover or allowing cover to lapse altogether.
In some commercial lines, FSL rates are now nearing 100% of premiums, with the addition of GST and stamp duty taxes on the FSL pushing the total cost of tax charged on the policy higher than the premium itself, while levies on homeowners' policies are nearing 50%.
“When you put homeowners and business owners at risk of under and non-insurance it’s unforgiveable,” Professor Manning says.
The groundswell of anger against the Victorian Government – which will incidentally make a massive windfall gain from the stamp duty imposed on the FSL – is already growing as brokers begin to understand the consequences for their clients.
ICA has given no indication so far that it has any form of strategy ready to roll out to ensure policyholder anger isn’t diverted on to its members.
The Government will finally reveal its hand when the transition legislation is released in the coming weeks, and we can expect that anger to reach fever pitch.
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