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Report urges end to brokers' role in building compensation scheme

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A final report on the NSW Home Building Compensation Fund (HBCF) has stuck to its initial recommendation of ending the mandatory use of brokers, despite objections from stakeholders who say the proposed change could backfire.

The Independent Pricing and Regulatory Tribunal (IPART) received a number of submissions that “strongly” disagreed with the draft proposal but the regulator says the change is necessary to address the cost burden facing builders who must buy insurance cover through the HBCF scheme for residential works exceeding $20,000.

IPART's final report maintains using brokers adds about 15% to the premium cost of a policy. Under the current arrangement, the main role of a broker is to help a building business through the eligibility process, which involves the submission of complex financial information tailored to the requirements of the scheme. Brokers also purchase certificates of insurance on behalf of a builder.

“Under our recommendation, building businesses could use an accountant or other business professionals if they require assistance with their application, or they could complete it themselves,” IPART said. “This should put downward pressure on brokerage costs, because brokers would have to demonstrate value for money, and provide greater choice to builders.”

Some stakeholders who oppose the proposal say using brokers will ensure builders meet their obligations to purchase insurance. They also say brokers offer the most cost effective way of managing builders' eligibility assessment applications.

But IPART says where eligibility issues do arise, builders would be able to reach out directly to icare, the only insurance provider in the state’s home building compensation scheme. Private insurers have refused to join despite changes to draw in new entrants because the scheme continues to lose money as premiums were set below breakeven levels.

The National Insurance Brokers Association says its members have an important role to play despite IPART’s insistence that using intermediaries adds to the cost of obtaining HBCF insurance.

“We note that this scheme has a long and difficult history, and that there are many issues remaining with the number and cost of claims against the scheme, the quality of building work and the level of benefits provided to property owners,” CEO Dallas Booth told today.

“Brokers have played an important role in this scheme, assisting builder clients meet their HBCF insurance obligations. The information that is collected, analysed and presented on behalf of builder clients is complex and detailed.

“There may be some building firms who have the competence and capacity to do this work, but NIBA believes the overall position is that insurance brokers play an important role in gathering information and providing it in a manner that is accurate and sufficient for HBCF purposes. We therefore believe there is an important ongoing role for insurance brokers in this scheme.”

IPART's final report also called for legislative changes to allow non-insurer providers such as fidelity funds to offer products that do not have insurance-equivalent protections. It says many non-insurers are interested to enter the market and that such a change could increase competition, resulting in improved product choice and lower costs for homeowners.

“Until improved regulation and governance in the residential building industry translates to reduced defect risk, the HBC market is unlikely to attract a lot of interest from private insurers,” IPART said. “In the meantime, the market would benefit from having niche providers offering some building businesses a choice to compete with icare’s insurance product.”

Click here for the report.