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Cutting out the insurance “free rider” when it comes to funding fire services

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From July this year, Victorian councils began collecting the fire services levy through property rates, rather than taxing insurance policies. Formerly the levy was funded by a tax on insurance companies and therefore passed on to the consumer in the pricing structure of their insurance policy.

The Victorian Treasury says current model is premised upon equity and removes flawed and unfair laws and mechanisms. The Insurance Council of Australia has endorsed the move, claiming it to be the “biggest tax reform since the introduction of the GST”.

 

It brings Victoria into line with the majority of Australian states which now utilise a property-based model for funding of fire services. South Australia was the first state to embrace a property-based model in 1998, followed by Western Australia in 2004, Queensland and most recently Victoria.

In Tasmania there is a hybrid system in place using a property services levy for household policies with a tax imposed against commercial insurance and motor vehicle insurance.

But despite being our most populous state, NSW has opted to retain a levy on insurance premiums.

“Free rider” problem

Essentially, the more costs imposed on insurance premiums, the less incentive there is for people to have insurance cover. Alternatively for those with insurance cover, there is less incentive to maintain adequate insurance cover.

But the disproportionate number of devastating natural catastrophes within the last few years – such as severe flooding in Queensland and NSW, Cyclone Yasi and fires in Tasmania, Victoria and WA – has created an impetus towards reforming the insurance regime for natural disasters and climate-related events in Australia.

Now, more than ever before, there has been a need to determine the most efficient and effective means to distribute and apportion liability for economic losses arising from catastrophic events.

The issue of cascading taxes (stamp duty and goods and services taxes – plus any fire or emergency services levy) was acknowledged by the Henry Review and the Victorian Bushfires Royal Commission. These reports recognised that it was a quintessential problem for insurance because the taxes once added to the insurance component could double the cost of insurance coverage.

The Productivity Commission has also highlighted affordability and access as key problems hindering the adequate spread of insurance.

In Victoria in the past five years, for example, insurance consumers have contributed $2.65 billion to fund the Metropolitan Fire Brigade and the Country Fire Authority in Victoria.

But all Australians receive protection from fire fighters when the need arises – so the “free rider” problem has significant implications on insurance penetration levels. Imposing a fire services levy on insurance meant that the impost was too high on the insured.

Although set up to examine the effects of flood rather than fire, the Natural Disaster Insurance Review – established by the federal government to determine the most preferable risk sharing arrangement – has recommended a greater role for the federal government to finance disaster risk to alleviate the burden on the other key stakeholders.

Although the NDIR did not undertake independent analysis on the effect of state taxes on insurance premiums, it did raise this as an issue as part of the affordability analysis. The NDIR referred to prior work suggesting that state insurance premium based taxes was behind 300,000 households being without home contents insurance and 69,000 households being without home insurance.

Implementing the Victorian Royal Commission’s recommendations to levy the charge through rates is hugely beneficial in providing greater economic protection and generating a greater insurance penetration rate.

A Fire Services Property Levy will now apply to real property (land and buildings), with the amount of the charge depending on the location, classification and valuation of the property.

In the newly created role of Fire Services Levy Monitor, Professor Allan Fels will be responsible for monitoring the transition phase, particularly ensuring any cost savings are passed on to consumers. The ICA has provided assurance that insurers will pass on any cost savings to consumers in Victoria.

Odd one out

NSW is now the only state which still imposes an emergency services levy on insurance – despite NSW Treasury formally acknowledging the inadequacies of their existing funding mechanism and a number of reviews indicating it is inequitable and unsustainable.

In 2004, the Public Accounts Committee recommended changes to overcome problems of lack of transparency and accountability in the collection of the fire services levy and problems with equity due to the “free rider” issue.

Then in 2012, a NSW Treasury review into the imposition of emergency services taxes on insurance concluded those with insurance could not continue to fund the 36% of those living in NSW without insurance coverage and who were not financially contributing to the maintenance of emergency services.

One of the reasons cited by NSW is uncertainty over the structure of the alternative scheme for providing emergency services funding.

Yet as most populous state, NSW should be following the lead of all other states if it is serious about increasing insurance levels Australia-wide. This should promulgate a more universal system of insurance for natural disasters and climate-related events.

 

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