High taxes and levies on insurance are forcing NSW brokers into placing “sub-optimal” cover for SME clients, the National Insurance Brokers Association (NIBA) warns.

NIBA says its members have been “regularly arranging” such covers for small business clients, as it again called for the controversial Emergency Services Levy (ESL) to be replaced with a broad-based property tax.

“The primary driver for [sub-optimal cover] is affordability and the key component of affordability is taxes and levies,” CEO Dallas Booth told insuranceNEWS.com.au.

He says sub-optimal cover is “anything that is less than an appropriate level” of insurance protection.

“Any cover is better than none. There is no doubt about that,” he told insuranceNEWS.com.au. But he adds this could mean “there could be areas where if there is a significant loss, the insurance payout may not be the full amount necessary to help the business recover from that loss”.

The cost burden is most acute for SMEs wanting to buy property insurance, NIBA says in a submission to the NSW Small Business 2020 Strategy Discussion Paper.

“The combination of GST, stamp duty and the Emergency Services Levy increases the cost of property insurance by up to 70% for NSW small businesses,” NIBA says. “This ‘tax on a tax on a tax’ can have unfortunate and undesirable consequences for small business owners.”

Business owners have in some cases decided to entirely forgo insurance, a decision that caught out many on the NSW South Coast when bushfires broke out in the area.

The “unfair” ESL scheme has also forced some business owners to seek non-traditional insurance solutions, with a discretionary mutual pool the most common option.

“In these cases, contributions to the mutual pool are not considered insurance premiums, and thus are not subject to the ESL,” NIBA says.

“While this is a reasonable outcome for the business that has access to these mechanisms, each time this occurs traditional insurance clients have to carry a higher proportion of the ESL, as the ESL funding model requires insurance companies to collect a dollar amount, not a percentage rate on premiums.”

The industry has repeatedly pushed for the ESL to be scrapped, saying it is a major reason for the state’s severe under-insurance problem.

The ESL scheme was supposed to be replaced in July 2017 with a property-based levy but the NSW Government pulled out of the plan a month before its implementation, a move that blindsided the insurance industry.

Click here for the NIBA submission.