Taxes will account for more than 50% of the cost of NSW home and contents policies from July, as sharp increases to the state’s Emergency Services Levy (ESL) kick in.

As revealed by insuranceNEWS.com.au earlier this year, the levy is rising by about 15% to improve firefighter access to workers’ compensation.

It continues to be funded primarily through insurance premiums, after the Berejiklian Government dropped a planned switch to a property-based council charge in 2017.

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The Insurance Council of Australia (ICA) says the “unfortunate” levy increase will shortly start appearing in insured customers’ renewal notices, and could lead to rising levels of underinsurance.

ICA says from July 1, goods and services tax (GST), stamp duties and the ESL will together account for more than half of the cost of NSW home and contents policies. For commercial policies, taxes will account for 60-70% of the cost.

By contrast, in the ACT where insurance taxes have been removed, policyholders pay just 10% GST.

ICA warns the levy increase “will hurt consumer and small business finances and will be detrimental to levels of non-insurance and underinsurance in the community”.

It says analysis shows the higher cost of premiums will result in a $20 million reduction in pre-tax expenditure on insurance.

“This means about 2000 households will drop their home building insurance and 9000 households will stop insuring their contents,” ICA spokesman Campbell Fuller told insuranceNEWS.com.au

“Many more will reduce their amount of cover to lower their premium, leaving them underinsured and potentially unable to resume their quality of life if their home were badly damaged or destroyed.”

Another ESL increase has already been flagged for next year, and there may be further announcements in the NSW budget, due to be handed down on June 18.

“Though the ICA recognises that firefighters’ workers compensation liabilities need to be funded, this should come from consolidated revenue, as is the practice for other government workers,” Mr Fuller said.

“Despite the Berejiklian Government’s decision to reverse last year’s ESL reforms, the ICA continues to advocate for the removal of this unfair tax.

“At present, insured property owners provide by far the largest share of funding for fire and emergency services that benefit the entire community, whether insured or not.

“NSW is the only state that continues to fund its emergency services in this unfair manner.”