An increase of more than 20% in the NSW Emergency Services Levy (ESL) has been condemned, with news emerging that councils are being let off from paying their share but no relief is being offered to insureds.

The increase in the controversial tax – which was set to be abolished prior to a 2017 u-turn – was foreshadowed in last year’s NSW budget, but Treasurer Dominic Perrottet has now confirmed a collection target of just short of $1.09 billion for the 2020/21 financial year.

This represents an increase of 21.38% on the previous year, and insurers are adjusting rates to take the rise into account.

A levy on insurance premiums makes up the bulk of the funding, but local councils also contribute. However, an NSW Government local government stimulus package has provided $32.76 million to “meet the increase in the Emergency Services Levy for all NSW councils”.

A Treasury spokesman confirmed to insuranceNEWS.com.au that insurers will have to pay the full amount, but declined to explain why.

“The state’s emergency services are funded through a long-standing arrangement that involves insurers as well as state and local governments,” the spokesman said.

“The Minister for Local Government recently announced a broad-ranging package of assistance for councils in response to the significant impact of COVID-19.

“This was so councils could play their important role in supporting the community and businesses during the pandemic.”

The Insurance Council of Australia (ICA) says the levy increase is “unfortunate and unfair”, particularly in the current economic environment.

“It will be a severe and unnecessary blow to householders and small businesses at a time of widespread financial hardship and economic vulnerability,” spokesman Campbell Fuller told insuranceNEWS.com.au.

“Insurers are also anticipating a sharp decline in new policies and renewals due to the weak economy and impact of COVID-19. The ESL burden will therefore fall on fewer policyholders.

“This will push the combined taxes on household premiums to typically 50% or more. Small businesses that buy insurance will pay at least an additional 70% above the base premium in taxes.”

Mr Fuller says the combination of the ESL and state stamp duty will “exacerbate non-insurance and underinsurance”.

ICA says it is discussing with the NSW Treasury ways to help insurers manage the collection of the ESL in the current environment to provide more certainty to customers and insurers.

“The NSW Government should commit to abolishing the ESL on insurance,” Mr Fuller said. “Its decision to assist councils suggests the Government has scope to recommit to the ESL reform agenda.

“The insurance industry encourages state and territory governments to review the impact of taxes on insurance in the context of the worst natural disaster season on record and COVID-19.”