The Victorian Government’s decision not to phase out the fire services levy (FSL) through a graduated process is alarming premium funders, who see their risk increasing if policyholders cancel policies early to avoid double tax.

Premium funders, who advance the full premium, are concerned they will be short-changed because insurers have decided not to refund the FSL component of cancelled policies.

When an insured cancels, the premium funder’s security is the unexpired portion of the policy. If insurers refund the unexpired premium without the FSL, the amount will not cover the debt to the funder.

Representatives from the National Insurance Brokers Association and the Insurance Premium Financiers of Australia are meeting in Sydney this week to discuss issues around Victoria’s transition from the FSL to a property-based levy on July 1 next year, and hope to provide more clarity on how the change can be managed.

The lack of a transition period, where the FSL would scale down while the property charge increases, has raised fears that policyholders may cancel policies early to avoid paying both the FSL and the property tax.

At least one insurer has acted to prevent cancellations by saying it will not refund the FSL component of any cancelled policies, which means there will be a shortfall in the return to premium funders.

Macquarie Premium Funding CEO Gary Seymour told insuranceNEWS.com.au this decision “erodes funders’ security” and although they can approach the client to pay the FSL portion that has not been refunded, clients are unlikely to see it as an obligation.

Premium funders write $5 billion of business, and Mr Seymour says significant amounts of money are involved.