The Insurance Council of Australia (ICA) has outlined three transition frameworks for the NSW Government to consider in abolishing its emergency services levy (ESL) on insurance in favour of a property-based tax.

It proposes the NSW Independent Pricing and Regulatory Tribunal (IPART) as the best insurance monitor of the transition, although it warns against monitoring being used as a “de facto price/premium-setting arrangement”.

ICA’s submission to the NSW Government inquiry into ESL reform says insurance premiums could be reduced over a transition year beginning next July 1, so the property tax would operate in full from July 1 2014.

It says the insurance sector could not meet any funding shortfall from “tapering” – when insurance contributions fall as the property tax rises – so the Government would have to consider funding a gap.

ICA says if tapering is used, “then a compulsory scheme with a defined and agreed methodology would need to be arranged and legislated across the general insurance sector”.

A legislated taper could reduce the risk of a funding shortfall, with an obligation on insurers to remit a minimum amount to the Government.

ICA says the Victorian Government’s move to abolish its fire services levy from July 1 shows the insurance industry can respond adequately to any risks of an “abrupt break”.

But it recommends measures to stop insureds “shorting” policies to avoid the levy, such as introducing a quarterly rather than an annual assessment to determine insurers’ contribution, and fixing the fire and emergency services’ budgets prior to the final year of contributions.

ICA says NSW can learn from the Victorian experience and suggests policymakers maintain an ongoing discussion with insurers.

It says “abrupt-end” risks apply in a model where for one year half the levy is charged on insurance and half on council rates.

The submission says NSW insurance taxes to fund the fire and emergency services have risen 25% in real terms over the past 10 years, well above growth in state taxation.