The State Insurance Regulatory Authority says claims pressure on the NSW builders’ warranty scheme will persist as the construction industry grapples with rising costs and labour shortages.

Its annual report says in 2023-24 the number of businesses entering external administration grew by 40% for the first time in the state and across Australia.

“This was due to rising interest rates, higher building costs, supply chain issues and labour shortages. These issues and the resulting increase in insurance claims are expected to continue,” the report says.

The mandatory Home Building Compensation Fund collected about $213.12 million last financial year and paid $136.22 million in claims.

State insurer icare is the only insurance provider in the scheme, which protects homeowners if their builder is unable to complete work or fix defects because they have become insolvent, died, disappeared or had their licence suspended for failing to comply with a money order made by a court.

This financial year, SIRA expects to complete a review of icare’s practices when determining if construction businesses are eligible for cover.

It engaged forensic accountant McGrathNicol to undertake the review, which “had a particular focus on securities accepted by icare against builder risk of insolvency. McGrathNicol examined icare’s eligibility assessments and determinations of 10 selected builders for the financial years 2018-2023.”

icare’s annual report says the scheme produced an underwriting surplus of $21 million and reported claims fell to 775 from 887 in 2022-23. In 2021-22, the number was 672.

“This financial year has been challenging for the residential building industry, marked by an increased number of insolvencies, especially among small to medium-size builders,” the icare report says. “While the number of claims received was less than the previous financial year, payments made to claimants increased by 9%.”

icare says the increasing number of insolvencies is a risk for the fund, particularly if larger builders are affected in future.

Click here for the SIRA report.