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Last month’s column ended with the observation that continuing to apply taxes and levies to insurance policies makes them less affordable and contributes to poor outcomes for the vulnerable in society. It also makes it more difficult to put innovative, competitive products on the market.
Most people would have little awareness of just how much they pay in taxes and levies on property insurance. Let’s shine some light on that.
Fire and Emergency New Zealand’s 2019/20 annual report shows $596 million was collected from those who insure their property through the FENZ levy, which is paid in addition to their insurance premium. This will now be over $600 million due to the annual growth in the number of properties and motor vehicles insured. GST applied to this levy is about $90 million, so the FENZ cost to those who insure their property is $690 million.
Another levy, the Earthquake Commission levy, is fairer because only those that insure receive the benefit of EQCover should a natural disaster occur. The EQC collected $503 million in levy in 2019/20 according to its annual report. GST applied to this levy is about $75 million, so the EQC cost to those who insure their property is $578 million.
Currently, insurers receive a 2.5% discount for collecting the EQC levy, equivalent to about $12.5 million per annum. The discount mitigates the need for customers to meet the costs of collection.
These include ongoing administrative collection costs which increase as the residential housing stock rises and increases the number of insurance policies to which EQCover applies.
New costs arise when changes are made to the EQC premium, as may occur before too long. Insurers carry not insignificant costs associated with making changes to their IT systems to enable this to occur. The discount is also used to defray costs when insurers implement a new insurance policy system, which can be particularly difficult and costly because the EQC premium is not calculated as a simple percentage of gross written premium.
Some insurers remit the EQC premium to EQC before they have received the full levy from their customers. This applies, for example, to policyholders who pay insurers by instalment. In these situations, the insurers carry a cost based on the time, value for money and reflecting the loss of investment income on the money advanced to EQC.
The discount is currently factored into the future financial projections of insurers, which informs all aspects of their business, including, in particular, the premiums charged to customers. If the discount did not exist, all else being equal, these costs would flow through to customers as increased premiums.
The discount is a relatively small but critically important acknowledgement of the costs of levy collection. However, it is overshadowed by the over $1.25 billion those who insure their property pay when all the levies and taxes on those levies are added up. It means those who insure their properties carry, disproportionately, more tax burden than other people.
Policymakers and their advisors should look at the big picture. Those who can least afford insurance to protect themselves will, if they cannot afford cover, become more reliant on State assistance after an event. Yet one of the key roles insurance plays for society is to relieve government from meeting disaster costs.
