The NSW Parliament has passed legislation to overhaul the state’s home building compensation scheme, allowing private insurers to enter the market next year for the first time since 2010.

The changes aim to encourage greater competition, ensure the scheme’s financial sustainability and maintain high levels of consumer protection.

Builders’ warranty is mandatory in NSW, with builders required to hold it for residential work worth more than $20,000. It protects homeowners if a builder cannot complete work or fix defects due to insolvency, death, disappearance or licence suspension.

“The current scheme has been in significant deficit for many years and is in need of serious reform,” Minister for Finance, Services and Property Victor Dominello said.

“We are delivering on our promise to deliver a modern, fit-for-purpose scheme. The future scheme will be risk-based, self-funding, sustainable, innovative and competitive.”

Key elements of the reform include:

• Providers can offer split cover for defects and non-completion, with homeowners entitled to $340,000 of cover for each product
• The introduction of risk-based pricing
• Providers may offer products that exceed minimum standards, and which need not be limited to cases where a builder is dead, disappeared or insolvent
• Enabling the State Insurance Regulatory Authority to use data analytics and enhanced information-sharing between building regulators to detect and manage builder insolvency.

The Insurance Council of Australia (ICA) says individual insurers will assess whether they wish to enter the market.

“The introduction of risk-based pricing will allow premiums to better reflect each builder’s level of risk,” ICA spokesman Campbell Fuller told insuranceNEWS.com.au.

“ICA believes this system may act as an incentive for sounder building and financial practices in the construction industry. Insurers will review the legislation to assess whether it provides commercial opportunities.”