Budget Changes to Accommodation Bonds

Back on November 21 last year, following the tragic nursing home fire, I posted an article on some of the specific insurance issues that arise around nursing homes. See http://www.allanmanning.com/?p=102.

I received the following Blog Question shortly after the Federal Budget was released.

Hello Allan.

Effective 1st July 2014, aged care facilities will lose the Federal Government’s guarantee on Accommodation Bonds.

Not only will this affect the credit policies of the banks lending to aged facilities, there will be an additional cost of insurance.

Would you be able to suggest what the additional cost of insurance would be.

Regards,

Paul [surname and email address provided]

My response was as follows:

As I understand the Federal government guarantee on Accommodation Bonds relates to the payment of bonds back to residents due to insolvency and/misappropriation.

All the covers Insurers currently have are based on the results of “Damage”. They do not look at what use the bond moneys are put to and there is no cover for investment failure or shortfalls. This is regarded as a business risk.

Under and ISR policy I have written an endorsement to cover the risk to the business if they have to return the bonds and lose revenue or have to borrow money to cover the repayments.

Under a business pack policy, it does need to allow cover for loss of investment revenue as well as sales. The additional costs incurred in respect of re-financing to enable necessary refunds, as a result of insured Damage needs to be a Additional Increase in Cost of Working cover and not just Increase in Cost of Working.

I am not  up on bond insurance enough to offer any real comment other than to say that such cover is available through specialist underwriters.

In reply Paul wrote back saying:

I spoke to Chubb yesterday and they raised questions about how insurers would address the possibility of insurance cover. The current potential loss (total market) is $12.1b and expected to increase to about $20b within 5 years.

The larger organisations may rely on their overall balance sheet as a form of guarantee but the smaller operators may struggle to find cover, particularly as the cost may be similar to a bank guarantee of between 2% and 5%.

I don’t think the Government as really thought this one through, as it will be a big cost to the providers, and therefore passed onto the consumer in some way.”

In discussions with Zurich Insurance who I approached as I know they are very big in the aged care sector and they advised that they are undertaking some work in this area with their Global Emerging Markets Division.

I am sure that other major insurers are also looking at this problem and as I learn more I will post updates.  Thanks Paul for your interesting question.

 

Hope this helps.

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