The Victorian Government has initiated a review of the funding of state fire services raising insurance industry hopes of long-awaited reform to the insurance tax system.

Treasurer John Lenders announced on Friday that the review will determine whether the “current funding mechanism is the most appropriate model”.

A green paper published on Friday comes as a result of the Victorian bushfires disaster in which 173 people died. Up to 30% of the 2029 houses destroyed in the fires weren’t insured.

The fire services levy for commercial customers in rural Victoria soared to 84% of the base premium in the wake of the disaster, exposing the government of Premier John Brumby to business and community criticism.

The green paper, Fire Services and the Non-Insured, proposes seven options: to retain the existing approach (which the Government still favours); to charge a levy on non-insured and underinsured property owners; or to require banks to demand mortgages be backed by compulsory insurance.

Further options include compulsory fire services insurance, compulsory property insurance, or replacement of the fire services levy in favour of a property-based system. The paper also proposes the mandatory collection of costs from the non-insured.

A proposed pilot study will consider the effect of the fire services levy on insurance to “assess options to improve equity in the funding of the fire services”.

Figures contained in the paper reveal insurers will provide $206 million out of a total $308 million in annual budgeted funding for the Metropolitan Fire and Emergency Services Board for 2009/10.

The Country Fire Authority will rely on $303 million from the insurance industry out of a total $403 million.

The green paper acknowledges that “some suggest that the impost on the insured is too high and has become a disincentive for property owners to adequately insure”.

“This is exacerbated by the fact that non-insured property owners who do not contribute towards the funding of the fire services receive the same protective fire services as insured property owners.”

Submissions to the green paper will open in June next year and close in mid-July. A subsequent white paper will follow the Henry Tax Review and the final report of the Victorian Bushfires Royal Commission.