The Lloyd’s Market Association (LMA) has warned syndicates writing Australian property business they face losses if they don’t correctly calculate their obligations for fire services levies (FSL) in Victoria and NSW.

Lloyd’s underwriters have been hit by the same issues affecting Australian insurers, with uncertainty over how the Victorian Government will replace the FSL with a property-based levy on July 1 next year. Now the LMA has issued an explanatory note in response to requests for information.

In it, LMA Senior Executive for Underwriting Keith Jones tells syndicate members significant sums are involved.

“For example, the last Insurance Council of Australia (ICA) advisory levy rate for commercial business in the Victoria Country Fire Authority area was 85% of the risk premium,” he said. “So underwriters need to pay attention to getting this figure right, as well as the risk premium itself, or they could find that overall they are writing business at a loss.”

The LMA says there are concerns policyholders will try to “short term” policies to June 30, 2013, by cancelling policies at that date and replacing them on July 1 when no FSL applies. If levies are set at a level that assumes all policies will run for 12 months, and that does not happen, it says insurers will have to fund the shortfall themselves.

It tells underwriters to decide on their own levy arrangements for the final year of the FSL in Victoria, saying they could limit refunds on cancellation or not issue short-term contracts – the response of Australian insurers.

Changes to the FSL calculation system have also forced the management committee of the London-based Australian Fire Brigade Charges Scheme to terminate the program – because the committee cannot recommend FSL rates for Lloyd’s syndicates and other foreign underwriters writing business in Victoria.

Insurers are given an amount to collect via the FSL and non-resident insurers have to use an Australian-resident broker as their agent. The fire brigades charge brokers for FSL owed by non-resident insurers. The scheme was established in 1982 to ensure brokers are not disadvantaged when placing business with Lloyd’s underwriters. The scheme collects the levies from underwriters and reimburses brokers.

Mr Jones says ICA is no longer giving Australian insurers an advisory rate and the scheme, Lloyd’s and the LMA cannot advise underwriters what levies to apply to policies.

“Acting on legal advice received, we are not in a position to either prescribe or recommend any rates to members,” he said.

“Without a common levy rate, the committee did not consider that the current mutualised nature of the scheme could be maintained.”

The scheme will go into run-off on December 31.

Mr Jones says although Victoria’s removal of the FSL is good for insurers in the long run, “for the final year of the current system it introduces further complications, as there are no transitional arrangements”.

ICA previously commissioned Sydney-based Professional Financial Solutions to calculate rates for Australian insurers and Lloyd’s Australia has negotiated a rate with the company to provide the service for underwriters who are scheme members.