WA’s Economic Regulation Authority (ERA) has recommended splitting builders’ warranty insurance (BWI) into construction and warranty cover, and letting the building industry provide post-construction warranty insurance.

Its report to Treasurer Troy Buswell says private insurers – currently QBE and Calliden – should continue to offer mandatory construction cover, but building industry associations could provide voluntary warranty insurance for six years after construction.

The WA Government would reinsure the construction cover.

The ERA separates construction from warranty because it says consumers carry much greater risk from houses not being completed, so are more likely to need mandatory insurance.

Losses from the construction phase are potentially greater, so insurers require more capital reserves for the product, but the long-tail nature of warranty claims means pricing is more difficult and it takes insurers longer to determine their profitability.

WA has about 1500 active builders. The largest 20 account for 64% of the market, a much greater share than in other states, where the figure is 20-30%.

QBE has 90% of the BWI market and Calliden 10%. QBE says it is reviewing its involvement in the market.

The ERA says the current model has not encouraged enough competition from insurers and is not capable of providing a long-term and stable consumer protection mechanism.

More private insurers may be attracted to the market if they can provide construction-only cover.