Ending the role of brokers in the NSW home defects compensation scheme would disadvantage builders, drive up premiums and create additional issues if icare were to take over distribution, the National Insurance Brokers Association (NIBA) says.

State-owned icare is the sole provider for the Home Building Compensation Fund (HBCF), which covers new low-rise property defects when owners are otherwise unable to be compensated. Builders are required to take out the insurance cover, which is purchased through brokers.

But a draft review by the Independent Pricing and Regulatory Tribunal (IPART) says the use of brokers contributes to a 15% increase in costs and recommends making their involvement voluntary.

NIBA says brokers provide valuable services to both icare and clients and if the current system is replaced those responsibilities would need to be borne by another party.

“Currently, icare HBCF does not have the capacity to manage a portfolio of thousands of HBCF-eligible contractors and would need a significant investment of government capital to do so,” it says in a submission to IPART.

“This would increase the administration costs of the scheme, raising premiums and negating any savings that had been achieved.”

icare would also not be acting independently in the interests of builders if it assumed the distributor role, creating a moral hazard, NIBA says.

The 23 authorised broker distributors involved have responsibilities including facilitating payment of premiums, managing disputes, builder eligibility reviews, operational management and issuing of the certificates of insurance.

NIBA says the insurance is “an incredibly specialised product” and builders don’t have the expertise in the area to manage the process without advice.

“Distributors also provide a boot-leather saving to their clients,” it says. “HBCF is not a ‘set-and-forget’ product; distributors are engaging with their clients on an almost daily basis to ensure that they are meeting their requirements.”

Competition between distributors has led to cost impacts below the 15% identified in the IPART draft report, the submission says.

NIBA has also flagged its view that icare should delay a tender process to establish a new distributor panel until IPART has completed its report, and warns any move to reduce distributor numbers would only decrease competition and limit choice.

The ability to provide the insurance should not be determined by “arbitrary limits” set by icare, it says, while also highlighting concerns about a focus on pricing models as part of the new tender process.

“NIBA’s very firm view is that the distributor is engaged by the builder client, is responsible and accountable to the client, and negotiates the remuneration arrangements with the client in a competitive market environment,” it says. “It is not necessary or desirable for icare to be intervening in these arrangements.”