A special review of the NSW Home Building Compensation Fund has included in its final terms of reference an investigation into insurers’ participation in the loss-making scheme.

Any impediments that stop the industry from providing cover through the scheme will be examined, according to the terms set by Customer Service Minister Victor Dominello.

The Independent Pricing and Regulatory Tribunal (IPART) is leading the review and will also examine whether the scheme needs to further mitigate builders’ insolvencies and whether existing incentives encourage the building industry to undertake good risk management.

“IPART should review the effectiveness and efficiency of the home building compensation fund in protecting consumers who are currently covered under the scheme,” Mr Dominello says.

An issues paper will be released next month, followed by a draft report in June. The report is expected to be ready in August.

The Insurance Council of Australia has previously submitted in past reviews that risk-based pricing of insurance premiums plays an important role in encouraging better building work and practices.

Spokesman Campbell Fuller told insuranceNEWS.com.au that undertaking good risk management and business practices “may ultimately help reduce the likelihood of defective building work or insolvency”.

The 2018/19 annual report of icare, the sole insurer offering cover through the builders’ compensation fund, shows the scheme made an underwriting loss of $235 million.

It has $637 million of unfunded liabilities as at June 30 last year, with the deficit larger than forecast in its 2018/19 business plan.

“This has mainly been driven by strengthening in anticipated future claims costs, unanticipated changes to assumed future investment returns and less positive economic assumptions,” icare’s annual report says.

Insurance through the fund is mandatory for NSW builders undertaking residential works worth above $20,000, and applies to dwellings up to three storeys high. The scheme covers homeowners for defects, builder death and insolvency, licence suspension or disappearance.

Click here for more details on the terms of reference.