The National Insurance Brokers Association (NIBA) has criticised a NSW Independent Pricing and Regulatory Tribunal (IPART) proposal to end the mandatory use of brokers in the state’s building defects compensation scheme.

IPART says the use of brokers and the purchase of certificates of insurance adds about 15% to the cost of cover provided under the Home Building Compensation Fund (HBCF).

“Providing builders with more options around how they manage their obligations under the HBCF provides a greater incentive for brokers to demonstrate value for money, placing downward pressure on their fees, as well as allowing builders to avoid these costs entirely,” a draft report says.

NIBA says the proposal has the potential to negatively impact many of its members involved in the area.

“Also concerning is the lack of understanding the report shows as to the nature of the HBC space and the requirements set out of [NSW state insurer] icare,” it says.

“NIBA will be providing a submission to the review to ensure that these misconceptions are corrected and that the tribunal is provided with the appropriate information to make informed recommendations.”

icare is the only provider for the scheme, which provides a last-resort recourse for owners of new low-rise properties when they are unable to be compensated for defects due to a builder becoming insolvent or disappearing.

Changes were made in 2018 to open the market to other insurers, but new entrants have been discouraged from entering as icare’s fund has continued to make losses after premiums were previously set below break-even levels.

IPART recommends changes to allow non-insurer providers, such as fidelity funds, to offer alternative indemnity products under the scheme, and also recommends offering separate construction period and warranty period products to encourage new entrants

But the report says icare is still likely to remain the default provider in the short-to-medium term, particularly as the COVID-19 pandemic is likely to increase insolvencies and claims.

“Consistent with the NSW Government’s approach to regulating other monopoly service providers, an independent regulator should determine icare’s premium prices to replicate the outcomes of a competitive market,” it says.

Recommendations also include that the State Insurance Regulatory Authority increase its oversight of icare by reviewing the builder eligibility model and claims handling processes.

Under the scheme, builders are responsible for taking out HBC insurance on behalf of homeowners.

A virtual public hearing on the draft recommendations will be held tomorrow and submissions on the report are due by October 16. A final report is due by November 30.

The draft report is available here.