Talk about missing the boat

I was mortified to see that the only response that the Insurance Council of Australia made to latest news on the fire service levy was to applaud the news. See: http://www.insurancecouncil.com.au/media/89752/010512-victorian-budget-fsl-final.pdf

To my mind, this press release completely misses the boat. Let me explain why:

  1. It was the Brumby Government under pressure from the Victorian National Party following the Victorian Black Saturday Royal Commission, and campaigns such as that mounted by www.NoTaxOnInsurance.com.au, Insurance News, Insurance News Australia, NIBA, Zurich Insurance and a great many individuals within the Insurance Industry that announced the removal of fire service levy back on 27th August 2009 and not this current Baillieu Government.
  2. For this, the 2011/2012 period the Fire Service Levy imposed on the insurance industry went up by nearly $100 million from $544.2 million in 2010/2011 to a revised $641.9 million for 2011/2012.
  3. The expected Fire Service Levy for 2012/2013 is a further $580.5 million.
  4. The reason for the increase is that this government pushed through $250 million (1/4 billion dollars) of capital expenditure in full to the Insurance Industry before it moves to property rates. The benefit of this capital expenditure will benefit all Victorians for 20+ years and yet the Insurance Industry through the prudent and risk adverse have met the full cost.
  5. Despite Queensland, South Australia and Western Australia all realising the need to pro-rate the transition of fire service levy between the outgoing tax on insurance and the property tax, the Baillieu Government are saying that the Insurance Industry has to meet the full cost.
  6. The Victorian Government refuse to work together with the Insurance Industry to work out a uniform approach to solve the major problem. (I wonder if the Victorian Government will take the same approach to the local governments. I doubt it – the policitical backlash would be too great.)
  7. Let us not forget the Baillieu Government delayed the removal of the insurance-based Fire Service Levy by 12 months!
  8. The government have had since August 2009 to work this out and could have (or should have) followed the working success of the transitional arrangements used by Queensland, South Australia and Western Australia, but only give the Insurance Industry less than 1 month to sort it out.

It is point 5 that is causing the greatest grief to the Insurance Industry including the insurance companies that the ICA claims to represent.

Let me explain why. We all know that everyone in the community’s insurances do not fall due equally each month. There is still a cluster around the end of each quarter with 30 June the busiest time, particularly for business insurance.

The situation is made more complicated by different rates charged for Insureds in the Metropolitan Fire Brigade area as opposed to the Country Fire Authority area. On top of this there is a higher rate for commercial, business interruption and contract works than there is for home and contents.

Yet another complication is that the amount each insurer pays is based on their market share for the product at the end of the period not at the start. No-one can forecast their market share with 100% accuracy.

Let us ignore all these complications and for the sake of simplicity, let us assume that insurances did fall due equally each month and that people paid their rates each quarter. This means that if $580,000,000 is be collected the Insurance Industry need to collect $48,333,333 per month for 12 months.

If the Victorian Government had said in this year of transition: right insurance industry we need half from you ($290,000,000) and we need half from property owners ($290,000,000) through rates then it would be a realitively simple exercise to divide the monthly figure by 12 and the pro-rata the number of months the Insured is expected to meet the fire service levy. That is 11.5 months for July 2012 renewals down to .5 for June 2013 as set out in the following table.

Simplified Prorata allocation of Fire Service Levy by month

With the Victorian Government refusing to allow the transition between property rates and the insurance industry, insurers are left with two choices. The first alternative is to just charge the $48,333,333 per month across all insureds.

The unfairness of this is easily shown. I have already explained that for historical reasons a disproportionate number of commercial policies fall due on 30 June each year. Australian insurance policies expire at 4 pm in most cases. This leaves 8 hours of insurance cover from 4 pm on 30th June to midnight on 30 June and the Insured is expected to pay 12 months fire service levy for that 8 hours bearing in mind they paid the other 365 days less 12 hours with the 30th June 2012 renewal. That same insured will then get hit for the full 12 months fire service levy with their property rates.

The alternative is that the Insurance Industry pro rata the Fire Service Levy for the full $580,000,000 to be collected. The effect of this approach is shown in the table below:

Fire Service Levy if collected by Insurance Industry Alone

Clearly this is equally as inequitable. In the last year of the fire service levy if your insurance falls due between July 1 and 31 December 2012 you are expected to pay much more than the norm for the same service as someone whose policy falls due in June!

There is just no simple fair and reasonable solution other than to have a transition where the collection of the tax is partially funded by fire service levies and part by property rates.

With the state of the Victorian economy compounded by the uncertainty of the effect of the carbon tax on reinstatement and replacement values of insurance the position the Baillieu/Ryan Government have put home and business owners in is simply unforgivable and shows a complete abrogation of their duty as a government. (I mention Peter Ryan here as he is the responsible minister and the one who campaigned so hard against the fire service levy while in opposition. – To me he has broken an election promise as important and damaging on our economy as Ms Gillard on the Carbon Tax).

So what will happen? Insureds are already writing to me saying they will not insure and take the risk. That is no good for them, their employees or the economy. Clients will ask their insurance broker or insurer to extend their insurance until 1 July rather than pay for a full 12 months.  This will mean double the administration and at the end of the day most insurance in Victoria falling due on 1 July which from a protection point of view is unwise. I have spent the last 10 years campaigning to brokers to move the renewals way from 30 June.

Insurers are already changing their policy on refunds and will not refund Fire Service Levy or State Government Stamp duty on policies that are cancelled mid term. I have already posted that the first of the major insurers have increased their fire service levy across the board.

This is without doubt the biggest cock up I have seen in my 41 year insurance career. Like most of us, I have come to expect this from our politicians. They just do not get it. It is all about their position and stuff the economy, the business owner, the home owner and the employee.

But I think there is more to it than just a cockup. Remember the old adage about it being a cock up or a conspiricy? Well I genuinely believe the Victorian Government know exactly what they are doing. They want the benefit of the triple tax that GST and State Goverment Stamp Duty brings to them by leaving the Fire Service Levy with insurance for as much as possible. See http://www.allanmanning.com/?p=924. That is why they will are not prepared to follow the earlier states example. It is pure unadulerated greed when you factor in the 1/4 billion capital expenditure and the delay by 12 months of the removal of the levy! They think the electorate is stupid and cannot see the trickery that is going on because it is not spelt out in the budget.

What I cannot understand or accept is the Insurance Council of Australia’s stance on this. They got caught being completely unprepared with the flood issue. I can live with that as it was sudden and the media attack was fierce. This issue is completely different. The ICA should have been on top of this for our industry and more importantly for their members and the insuring public for the past 20 years or more. Clearly from their press release they appear to only have a superficial understanding of what is really going on and have fallen for government’s spin: hook, line and sinker.

I ask the member companies of the ICA to question the value of their industry association. To me, our industry and our economy would be better off without them. If they congratulate a government that has introduced such a flawed policy then it makes it even harder to have the position over turned. It also means that the New South Wales government, who are currently carrying out a review of their Fire Service Levy may well follow the Victorian example.

We have a completely ineffectual opposition in Victoria and while industry journalists clearly understand the problem, the main stream media do not.

So where does that leave the rest of us that can see just how damaging this is for our industry, our customers and for the Victorian government.

The first thing is to write to your local member and explain to them the problems that the current policy will create for the insuring public. Secondly, no matter what your political persuasion, show your displeasure at the next state election and remember who got rid of the tax (the Brumby Government) and who stuffed up and got unbelievably greedy with the transition (the Baillieu/Ryan government)!

2 responses to “Talk about missing the boat”

  1. Alex Kelly says:

    Allan,

    I have recently started reading your blog and love your style, your comments and your clear explanations. If only the wider public could read it and understand more about insurance!

    I would like to add you to my professional network on LinkedIn.

    Alex

  2. Kaye Meurer says:

    I wrote to the ICA a few weeks ago, before their press release May 1, 2012, asking why they were not standing up on behalf of Insurers and the public and advising the public of the changes to the FSL and the impact the changes would have on insurance policy holders. One of my comments was that I felt they were not representing members by remaining silent. The response I received from the (ICA) was an immediate phone call ( a very angry phone call I might say) telling me in no uncertain terms that it was not my position to criticize the ICA, that I had no idea how many press releases they “put” out each day and that no one picks them (press releases) up. My response to this man ( I will not call him a gentleman) was that obviously my email hit a raw nerve and that perhaps my email was not the first they had received questioning their effectiveness AND if their press releases were not being picked up, he perhaps should look at how well he wes fulfilling his role within the ICA and also that the media section within the ICA is clearly doing a poor job!!!!

    What I have read in the ICA press release dated May 1, 2012 clearly demonstrates how accurate my email to the ICA was. .

    I agree with Prof. Manning in that those that are members of the ICA should seriously question why they remain or plan to remain part of such an ineffectual organisation.

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