Concern is growing among insurers that they may be left to fund a massive shortfall in the Victorian fire services levy (FSL) in 2012/13 after the State Government failed to ensure a smooth transition from an insurance-based FSL to one funded through local government rates.

An Allianz spokesman told insuranceNEWS.com.au the possibility of policyholders trying to avoid their FSL liability is worrying insurers, who would have to make up any shortfall between the FSL collected from policyholders and the amount each insurer owes the State Government.

The Baillieu Government plans to move from an insurance-based FSL to a new property-based levy from July 1 next year, but has failed to reveal details of how the transition – which will begin from July 1 this year – will work.

The industry’s preferred system of transition, which was used when the FSL on insurance was removed in SA and WA, is for a reducing amount of FSL to be charged on insurance policies over the course of the year while the FSL on council rates is concurrently scaled up.

But there is no longer sufficient time for such a system to be introduced, and insurers have been instructed by the Victorian Government to charge a full year’s FSL on annual premiums leading up to July 1 2013.

As a result, policyholders who renew close to July next year will be hit with a full year’s FSL charge on their insurance rather than a pro-rata amount, before being slugged with an additional FSL charge on their council rates after July.

Insurers are concerned that commercial policyholders whose insurances renew towards the second half of the financial year may instead use policy extensions or switch to shorter-term policies to avoid paying a full year’s FSL charge on their insurance, as such policies would only attract an FSL charge commensurate with the policy term, leaving insurance companies to fund the difference.

They are also worried that policyholders may cancel policies early to receive a refund on both the premium and FSL for the unused portion of the policy.

Because the FSL on insurance has historically been a rolling, annual charge, insurers can usually make up for any shortfall, or return any excess FSL collected by reducing the charge, in the following year.

But the Allianz spokesman says that as the levy on insurance comes to an end, “insurers could be left short with no capacity to make up the shortfall”.

The company is calling on the Victorian Government to consider introducing anti-avoidance measures in the transition legislation, such as a provision which prohibits policyholders from cancelling policies early or taking out short-term policies for the sole purpose of avoiding the FSL.

insuranceNEWS.com.au understands that the Insurance Council of Australia (ICA) has also been in discussions with officials from the Victorian Department of Treasury and Finance over potential anti-avoidance measures.

The Victorian Government is understood to be checking whether it has the legal power to instigate such measures.

The proposed transition legislation is expected to be released by the Victorian Government in the next few weeks so it can be tabled in Parliament ahead of July 1.

Also see ANALYSIS