Insurers will contribute $641.9 million to Victoria’s fire services levy (FSL) this financial year, an 18% increase.

Insurance companies will also have to calculate individually how they charge the levy after the Insurance Council of Australia (ICA) was forced to abandon the mechanism by which actuaries calculated the charge to its member companies.

The changes have prompted insurers to start raising premiums, with QBE last month raising the FSL component from 85% to 95% for country clients and to 54% from 44% for metro clients. Other insurers are expected to follow.

Victoria’s budget papers show this year’s FSL from insurers will increase again from the record $544.2 million raised in 2010/11, to fund upgrades to the Country Fire Authority (CFA) recommended by the Victorian Bushfires Royal Commission.

The FSL is budgeted to fall to $580.5 million in 2012/13 as the CFA’s expenditure winds down.

The levy is set at 77.5% of the CFA’s budget and 75% of the Metropolitan Fire Brigade’s budget, and the insurance industry is given an overall figure that is apportioned to individual insurers, which then calculate how to charge it to premiums.

The State Government has committed to replacing the FSL with a property-based levy from July 1 next year and will announce details soon, with further information in the 2012/13 budget update in December.

As reported in insuranceNEWS.com.au last week, the Victorian Government is understood to have rejected a transition period under which the levy would be phased out over a year, with property tax rising as insurance premiums fall.

insuranceNEWS.com.au also understands that ICA abandoned its system of using actuaries to apportion the FSL to insurers after the State Government alleged it was anti-competitive.

This has forced insurers to make the calculation themselves, based on estimates of their market share. The risk to the insurers is that if they get their calculations wrong and collect too little, in which case they will have to make up the difference.

If they collect too much, they keep the funds but risk being accused of gouging consumers.

An ICA spokesman told insuranceNEWS.com.au that the amount recovered by insurers from policyholders for their statutory contributions for the fire services “is an individual commercial decision for insurers”.

“Insurance companies will be applying their own calculations according to their own circumstances.”

National Insurance Brokers Association (NIBA) CEO Dallas Booth says abandoning the ICA mechanism may result in different insurers charging different rates for apparently similar risks.

He says NIBA is waiting to hear from the State Government on the process for phasing out the FSL.

“You can’t blame QBE for what is being done,” he said. “This is an antiquated system that should have been removed by state governments years ago. The sooner Victorian policyholders get the benefit of no FSL, the better.”

ICA has welcomed the Government’s budget commitment to replace the FSL with a property-based charge. It has also welcomed the predicted fall in the levy next year.

CEO Rob Whelan says the reduction “is welcomed by the industry and will assist in smoothing the transition from the FSL”.