A review of the funding of New Zealand’s fire service has recommended the insurance levy be calculated on premiums rather than the sum insured for non-residential property.

The Insurance Council of New Zealand (ICNZ) and Insurance Brokers Association of New Zealand (IBANZ) have rejected the recommendation, saying the Fire Service Review Panel has missed the opportunity to abolish insurance taxes and move to a property-based levy.

They say that calculating levies based on premiums exposes the Fire Service to premium volatility and will make its budgeting task difficult.

IBANZ had argued that New Zealand should follow the example of most Australian states in abandoning the insurance levy for a charge on all property-owners.

ICNZ had also argued for a property-based system and is researching how it could work.

CEO Tim Grafton says retaining the insurance levy does not address the issue of “freeloaders” who either underinsure or do not insure their properties.

The panel will now consult with key stakeholders, including the insurance industry. It says further work is needed on its recommendations and if this shows a levy on commercial premiums is not suitable “then the existing base for non-residential property will be retained but with the provisions redrafted to limit the most significant opportunities for levy minimisation”.

It says a levy on premiums rather than sum insured would address minimisation and avoidance opportunities.

IBANZ, Vero and the NZ Fire Service are currently involved in legal action over collective and split tier policies, which the Fire Service says enables insureds to reduce their fire levy. (See NZ Fire Service lodges appeal over composite and split-tier policies) When policies are tiered, the levy may only attach to the tier providing fire cover.

The panel’s report was written prior to the High Court’s judgement on the matter last year, now being appealed, and the panel says “considerable sums ride on the outcome”.

The report says the incidence of fires in New Zealand has dropped dramatically in the past 20 years and the fire service has become responsible for removing people trapped in car crashes, decontaminating people exposed to hazardous materials, pumping out flooded houses and covering roofs with tarpaulins in high winds.

It says that broadening the funding base would reduce the cost to all contributors, and proposes a mixed funding system that would extend the levy base for non-residential property from contracts of fire insurance to all contracts for material damage.

The report also calls for caps on the levy for residential and personal property to be adjusted to current levels from 1994 values, as well as an “appropriate contribution” from the transport sector. The report says the service should continue to charge for attending non-fire incidents where the beneficiary has not paid a fire levy.

IBANZ CEO Gary Young told insuranceNEWS.com.au that switching the levy to material damage policies will not broaden the collection base, as most of them include fire risk.

He says the Fire Service seems unaware of how exposed it will be to premium volatility if the levy is calculated on premiums rather than sum insured.

Following the Christchurch earthquakes, the New Zealand insurance industry is expecting a few years of high premium volatility and the panel says the levy rate may have to be reset annually to generate the funding required by the fire service.