The Government’s recent decision to reject an alternative way to fund Fire and Emergency New Zealand (FENZ) than insurance is flawed.
That said though, the priority must now be to avoid the complexity and cost of the poorly conceived 2017 funding regime that is still scheduled to come into effect in 2024.
FENZ takes over $600 million a year, and climbing, to fund. Almost all of that comes from a levy on those who insure their property. The government contributes a mere 1.6% of FENZ costs and many government institutions do not bother to insure.
Where a levy on insurance existed offshore, it has largely been removed - recognising fairer, less costly, and more efficient ways of running a service that provides a public good for all. The levy was introduced in 1993 as a temporary measure and over a dozen reviews since have pointed to its removal from insurance.
The most recent review was not allowed to consider general taxation as a source, but the consultation document rated some form of property levy as better to meet the funding criteria of universality, stability, and equity. It also clearly marked the vehicle registration as the best mode for collecting that aspect of the levy charged on insured vehicles.
It is claimed that ‘high-level’ analysis shows that the levy on insurance is fit for purpose. We are now left to engage constructively with the government to make an unfair system easier to implement.
Among the biggest problems of the 2017 Act’s regime is the shift from applying the levy to fire policies to any insurance policy that covers material damage loss, and to apply the levy to the ‘expressed maximum limit’ or alternatively the ‘declared value’ for which the insured can be indemnified.
FENZ is currently funded by applying the levy to the indemnity value of fire insurance policies and for the past 30 years this has met its needs. And it is well understood.
Changing the basis of the levy will cost up to $50 million for insurers alone to implement and that does not count brokers’ costs. One consequence of broadening the application of the levy is that it opens the scope for the levy to be applied to two or more insurance contracts covering the same asset. In other words, double-dipping.
Although double-dipping can occur now, the issue becomes a lot larger not only because of the broader scope to any material damage policy but also the values increase since the levy applies not to the indemnity value, but the ‘maximum sum insured’. This may be particularly hard on the insured and may lead to under-insurance or non-insurance, thus making them more vulnerable.
These and other problems with the Act, such as the definition of a motor vehicle that would see trailers and ride-on lawnmowers caught, or the definition of a residential building at odds with the EQC Act, which itself will soon change, have been subject to days of discussions with FENZ.
This has resulted in some guidance to work around the deficiencies and ambiguities created by the Act.
However, a far better way forward now would be to amend the Act to make improvements to the status quo. These should be designed to make levy collection simpler and less costly for all. The Government should also take guidance from insurers about legislative wordings, so they align with those goals and not hand the pen to those who have little understanding of the sector.
Given the extensive systems changes the sector will have to implement in the 2023/24 period, it is also important to move out the implementation date.