Terrorism Levy – Another hidden tax on insurance – You will be surprised just how much – a whopping 45% of terrorism levy collected.

Terrorism Levy – Another hidden tax on insurance – You will be surprised just how much – a whopping 45% of terrorism levy collected.

Where do we start on this thorny issue…

Point 1.

Report after report urges governments to remove taxes on insurance. The Federal Government’s Productivity Commission inquiry on “Competition in the Australian Financial System” released earlier this year is the latest to do so. In fact, every time the issue has been looked at, going right back to the Royal Commission into the collapse of HIH, has made this recommendation.

Point 2.

I strongly believe the way that the terrorism levy is determined on Australian businesses is seriously flawed. While I have written on this many times, I would explain that the fact that the Terrorism Levy is based on a percentage of the premium fails to match the rate of the levy with the risk.

Insurance premiums on property and business interruption are determined by a large number of variables with natural catastrophe losses being a major determinant, but other factors such as investment income, claims ratios in general, to name a few, are all involved. During bad years for the insurance industry, like the year we had the Brisbane Floods, Cyclone Yasi, and 6 other declared natural disaster events (2010) premiums increased. Despite the risk of terrorism falling during the same period, the terrorism levy did not reduce to counter the effect of the increase in premiums. This has, in effect, created a giant windfall to the pool.

Then, when premiums started to fall again 5 years later with normal competitive forces in the Australian Insurance Market, the pool had to increase the terrorism rates in 2015. The current rates are now:

  • 16 per cent for Tier A, [ the Central Business District in Sydney, Melbourne, Brisbane and other cities with a population over 1,000,000 – interestingly not Canberra]
  • 3 per cent for Tier B, [Urban areas of all State capital cities and cities with a population of over 100,000;
  • 6 per cent for Tier C. [Those postcodes not in Tiers A or B]

The reason for this was that as insurance premiums fell the current percentage rate applied to insurance premiums to determine the levy was insufficient.

Now with a toughening market, premiums have been on the rise for some time but the rates did not reduce in the last review and will not for at least the next three years.

The key issue here is that the levy is not linked to the risk of terrorism, it is linked to the vagaries of the insurance market. If any other product was priced this way ASIC or APRA would be, I suggest, having a field day.

It is worse for those in NSW and Tasmania as the fire service levy is charged on not only the premiums but also the Terrorism Levy.

As an aside, I would hate to be a business along George Street in Sydney which is seeing the tram upgrade works drag on and on, being hit with higher insurance premiums, the terrorism levy and a fire service levy that was promised to be removed.

Point 3.

Now where is the terrorism levy going?

The 2017 Annual Report, (See: ARPC_Annual_Report_2016-17) which shows Australian Reinsurance Pool Corporation (“ARPC”) paid the government $147.5 million in 2016/17 as a dividend, and since the start of the scheme the ARPC has paid the government $697.5M in fees and dividends.

Page 46. Table 2.15 shows Gross Premiums written for 2016/17 was $121.9 million, (which is less than $147.5M paid to the government). If this is not a tax then I do not know what is.

Year to date $1.545 billion has been paid in terrorism levy with the government being paid $697.5M. This is a whopping 45%. I am sure every Australian insurer would love a dividend of 45% of premium income. I would start an insurance company myself!

My argument is that the Federal Government needs to start with itself and reduce the hidden tax on Australian businesses.

In fairness, the report does say that the retrospective portion of the dividends (no dividends were charged in the early years) is set to end in 2018.

I would like to see the entire dividend dropped and the value of the pool increased to the point that the level of reinsurance could be reduced and the levy itself reduced. This is on top of a fairer system of calculating the levy introduced, one linked to risk not a percentage of premiums.

 

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