Back on track
Life-savers: but most agree emergency services should not be funded through insurance
The New South Wales Government’s decision to scrap its Emergency Services Levy (ESL) on insurance in favour of an alternative model that doesn’t penalise policyholders has triggered cheers from policyholders, but an uneasy sense of déjà vu from insurers.
Eight years ago, also not long before Christmas, then-Treasurer Gladys Berejiklian said the ESL on insurance would be abolished. The change was due to take effect on July 1 2017, but the plan was abandoned a month prior – by Ms Berejiklian, who had become Premier, – due to “unintended consequences” for some persuasive parts of the community.
The insurance industry was shocked by the eleventh-hour backflip, and has since pushed for the reform to come back onto the agenda. The ESL was promoted as a campaign issue before this year’s March election, which was won by Labor, and the news insurers were hoping to hear was delivered on November 16.
“I can announce today that the Government will remove the Emergency Service Levy from insurance and apply it instead to property in the state,” Premier Chris Minns said. “This is in recognition that natural disasters affect everyone in NSW, and there’s a collective benefit in having fully-funded, well-prepared, well-resourced emergency services.”
The re-energised ESL reform process is taking place in a very different environment compared to six years ago when Ms Berejiklian changed course.
Insurance buyers have experienced a hard market, with the cycle turning even before the Black Summer bushfires and record-breaking flooding fuelled property premium increases and underscored the importance of cover.
Inflation has accelerated in the wake of the covid pandemic and geopolitical upheavals, interest rates are rising, cost-of-living pressures are hitting consumers and there’s more concern over people and businesses underinsuring or forgoing cover.
The Insurance Council of Australia (ICA) says policyholders have paid $5.6 billion in ESL on top of their premiums since the previous Government’s reform attempts failed.
“This unfair tax take has only worsened as the insurance market has hardened in the last couple of years and inflationary pressures have pushed up premiums,” ICA Chief Executive Andrew Hall tells Insurance News.
He says the new government’s decision to pursue reform shows a “real determination” to find a fairer and more equitable way to fund emergency services and improve insurance affordability for households and businesses in the state.
Mr Minns says Treasurer Daniel Mookhey will lead a consultation with industry and stakeholders and adequate time will be provided to design a fair and workable system.
Preliminary assurances include that an insurance monitor will make sure companies don’t keep premiums high after the ESL removal, the scheme will be revenue neutral, and this model will differ from the past version.
“We’ll learn the mistakes of the previous government’s attempts at this reform and ensure that we are investigating all potential methods of measuring the value of a property not just the unimproved value of the land,” Mr Minns says.
“Until the model has been finalised, I can’t give an exact figure on how much a typical family will benefit as a result of this change, other than to say a mortgage holder – who must pay insurance as a condition of their loan – will pay less under these changes.”
NSW and Tasmania are the only states still imposing a levy on insurance to fund emergency services and, at a time when natural disaster impacts are rising and recovery costs blowing out, NSW has the highest level of uninsured homes, at 17.5%.
That compares to 11% in Victoria and 9% in South Australia.
Under the NSW model insurance policyholders contribute 73.7% of the levy total, local councils 11.7% and the state government 14.6%. The levy is estimated to increase the cost of household cover by 18% on average, while for small businesses it has driven up commercial premiums by 30%.
Business NSW Chief Executive Daniel Hunter says insurance has repeatedly topped member cost concern rankings since 2019, and the expense has been rising well above the rate of inflation, driven by local and global factors.
“We are confident that NSW will be able to find a solution for replacing the revenues that the ESL has raised – because it has to,” Mr Hunter tells Insurance News. “The Government has committed to consultation with the community – including the business community – struggling with a widening insurance protection gap.”
The National Insurance Brokers Association, Actuaries Institute and the Financial Rights Legal Centre are among groups that have welcomed the reform, but some sectors have raised red flags. Not surprisingly, the state’s Property Council is one flag-waver.
“While we support moves to improve insurance affordability for families in NSW, the property sector is concerned with the proposal to calculate the emergency service levy on the capital improved value of land,” Property Council of Australia NSW Executive Director Katie Stevenson says.
“This approach will add further cost burdens on a development sector that’s already straining from a range of new taxes and infrastructure contribution charges.”
Local Government NSW has lobbied for ESL reform, but is worried that early discussions make no mention of decoupling the levy from council rates.
“I hope this was just an oversight and not an indication that council rates will continue to be cannibalised by the levy,” President Darriea Turley says. “Collecting the levy via council rates has to stop.”
History has demonstrated that much can change between the time a political announcement is made and when a reform is due to take effect. The current consultation process will take time.
Back in 2015 Ms Berejiklian put more focus on fire than flood, but the message was the same before the backflip.
“Fire does not discriminate and the community rightly expects that firefighters and SES services will be available to everyone in their time of need,” she said. “It is also fair to expect all property owners to pay their share for these vital services.”
NSW Labor says it recognises that the model that was left in place acts as a disincentive to taking out insurance cover, and ESL reforms would benefit home-owners, business, and the Government which is the insurer of last resort after catastrophes.
The Government is looking for a way forward in providing a fairer and more sustainable system that avoids previous pitfalls. As the state faces the threat of more natural disasters, it says the issue has been in the too-hard basket for too long.
“The bottom line is we need households and businesses to take out insurance,” Mr Minns says.