Any insurer that over-collects the Victorian fire services levy (FSL) this financial year will be expected to refund policyholders or pay the excess to the state’s Consumer Law Fund.

The FSL Monitor, Allan Fels, is overseeing how insurers remove the levy from July 1, and has issued 10 new draft guidelines to prevent price exploitation by insurers.

Six other guidelines on misleading or deceptive conduct apply more widely, including to brokers. The monitor says it will focus on communications to policyholders.

The guidelines carry a warning for insurers that decided not to refund the FSL portion of cover on policies cancelled before expiry. Policyholders should be refunded when the levy is separately identified on the invoice and the amount is withheld on the basis it is required as a contribution for fire services.

“Insurance companies and their agents should take care to avoid false representations or misleading statements regarding refusal to refund any FSL collected from policyholders where policies are cancelled [before July 1] and the cancellation results in a reduction in liability to contribute to the fire services,” the guidelines say.

Consumers need more information from insurers, according to Professor Fels.

“So far the level and quality of information provided to policyholders by insurers about the impact of the fire insurance levy reforms has been less than satisfactory,” he said.

The guidelines on price exploitation say if insurers have increased the FSL rate in 2012/13 as part of a tapering strategy to gradually reduce levy collection, the next financial year’s premium should be cut to reflect abolition of that amount plus reduced GST and stamp duty.

Insurers will collect about $550 million in FSL premiums in 2012/13; this amount should “fall out” of the industry’s revenue in 2013/14.

The price of insurance applies to individual policies rather than an insurer’s aggregate prices or its methodology for setting prices in general, the monitor says.

Insurance price may consist of four elements: the base premium, the FSL, GST and stamp duty. The prohibition on price exploitation applies to all of them.

If insurers claim higher costs offset any part of the reduced FSL, they will be expected to justify the cost increase in detail, Professor Fels says.

The monitor will consider five factors when considering whether a price is “unreasonably high”, only one of which needs to be present.

These are: abolition of the FSL; insurers’ contributions to the Metropolitan Fire and Emergency Services Board (MFESB); their contribution to the Country Fire Authority (CFA); historical levy charges; and the cost of supplying insurance against fire, such as reinsurance and expenses.

Insurers gave $229.17 million to the MFESB in 2011/12, down to $227 million in 2012/13. Their contribution to the CFA fell 22.5% to $322.25 million in 2012/13.

In assessing whether a price is unreasonably high, the monitor will consider an insurer’s total FSL collection relative to the contribution the fire services have required. 

The monitor acknowledges insurers face some difficulty estimating the final amount of collection this financial year.

“Nevertheless, the monitor expects insurance companies will not collect FSL in total that exceeds their liability to the MFESB,” the guidelines say.

After June 30 insurers should include in renewal tax invoices a declaration, formally endorsed by the CEO, saying the premium does not include the FSL, according to the guide on misleading and deceptive conduct.

The draft guidelines have been issued for consultation and final versions will be published next month.