Time to axe the tax

Time to axe the tax

Pressure is growing to finally ditch inefficient and damaging taxes on insurance, with one regulator signing off with a message of support

By John Deex

He’s been one of general insurance’s harshest critics in recent years, but former New South Wales Emergency Services Levy (ESL) Monitor Allan Fels ended his tenure as an unlikely ally.

Professor Fels’ position ran out on June 30, marking the end of a tumultuous period during which the NSW Government introduced reforms to scrap the controversial ESL, and then abandoned them at the last minute.

Professor Fels – initially employed to ensure that insurers passed on savings when the levy was removed – ended up providing a much broader commentary on the industry, investigating issues such as an alleged lack of competition and a “loyalty tax”.

This infuriated the Insurance Council of Australia (ICA) and its members, but they would have found a submission from Professor Fels to the bushfires royal commission much more palatable.

The submission backs up ICA arguments that the rising cost of the ESL increasingly contributes to underinsurance.

“Further increases in ESL are likely to see more policyholders reduce or eliminate their cover as consumers are more sensitive to price increases than price decreases,” the submission says.

Since Professor Fels’ submission, more reports have been added to the plethora already in existence that recommend reform.

The draft report from the NSW Review of Federal Financial Relations says “all specific taxes on insurance products” including the ESL “should be abolished and replaced by more efficient and broad tax bases, to improve the affordability and uptake of insurance”.

The Independent Review into South Australia's 2019-20 Bushfire Season found that “the removal of taxes from insurance would encourage a wider section of the community to take out insurance”.

In an interview with Insurance News, Professor Fels says he wasn’t in the role as the NSW Monitor “to report on the rights and wrongs of the [ESL]”.

“But we can certainly say the following,” he adds. “A lot of people find property insurance unaffordable and don’t take it out.

“We have emphasised that with the steady rise in premiums, fewer and fewer people can afford to pay, and the levy is a significant factor in that.

“If the levy was taken off or put on rates there would be a pick-up in the number of people who insured.”

Professor Fels says he is “well aware” of the argument that a broad-based property levy would be more fair.

“The shrinking population that chooses to take out home insurance bears more of the burden, and those that don’t get insurance get a free ride on fire services,” he says.

“That would not happen if it was transferred to rates. We are very conscious of the case for reform but that’s up to the [NSW] Government.”

Was it a mistake in hindsight to abandon the reform, given the devastating bushfires that ripped through the state last summer, with an estimated 80% of victims likely to be underinsured?

Professor Fels won’t be drawn on that argument. “They made a political call on the matter and there is certainly an ongoing cost and disadvantage about doing things the way they are. Maybe the Government will have another look at it in the light of the recent report.”

As Professor Fels looks back over his time as Monitor, he stresses that insurers overall coped well with a complex situation. This was despite a series of public spats between him and the industry.

“The whole situation was difficult because the reform was abandoned at the last minute, and after the initial price adjustments had been made. So it was complex and messy.

“Generally [insurers] handled it well. After all, if they hadn’t we probably would have been happy to go to court about it and we haven’t. So, where we found big problems they were exceptions to the general rule.

“In practice we talked with [ICA] a lot, but at a public level there was a certain amount of confrontation. Naturally I want to blame them, but I’m sure I had something to do with it. That often goes with the tense regulatory situation.

“Obviously we didn’t agree on certain things, but each side understood the other. We certainly made some adaptations in the light of what they said.”

Professor Fels identified more than $14 million in over-collection during his tenure, but he says for the most part it wasn’t deliberate.

“It is inherent in the situation that there may be over-collection, or under-collection. It’s just the way the tax is raised. The industry doesn’t know exactly how much to collect at the beginning and the end of a period.”

Over and out: Allan Fels’ NSW ESL Monitor role has concluded

He says he has no regrets about straying into areas beyond the specific application of the levy. He always knew his position was temporary, and as such wanted to leave a lasting mark on the industry while he could.

Professor Fels is particularly pleased that he was able to push NSW insurers to include the previous year’s premium on renewal notices.

“There was very strong resistance from the industry to that,” he tells Insurance News. “The industry told me it would cost massive amounts of money to make this change. It turned out that in NSW, I as the Monitor could use my regulatory powers to change that, and I did.

“I am somewhat afraid that once I’ve departed from the scene the price may be removed. But there is lurking the possibility of a federal law on this anyway.

“Incidentally, I assume it is equally costly to remove it as it is to put it on, and their computers would struggle with a change to remove last year’s prices. I’m pleased to have brought about that change and I hope it persists.”

Consumer groups have expressed concern about Professor Fels’ departure, saying there should be a permanent national insurance monitor. But Professor Fels isn’t convinced. “Some people would say ‘well, they should be there permanently because there is a chance of permanent exploitation from the insurance industry’. We didn’t want that and the Government didn’t want that.

“But there is a case for light-touch price monitoring and the Australian Competition and Consumer Commission would be an ideal body.

“There is already legislation that says if the minister so requires they can do monitoring. Not heavy-handed price regulation or control, just monitoring.

“I wouldn’t want to go over the top. Even though we have reservations about competition in quite a few industries, on the whole Australia’s approach is not to apply price regulation, or even pricing surveillance.”

Professor Fels points out that if ESL reform is reintroduced, the NSW Government will likely need to re-appoint a monitor.

“The case for monitoring on this is quite strong, because with price reductions there are pretty strong reasons to think that they wouldn’t be passed on very quickly if at all, and that is where the regulator is really important.”

And he isn’t ruling himself out for the job, if such a situation should develop.

“I think I know the story pretty well. What the Government wants to do, who knows?”

Despite his clashes with the insurance industry, he says insurers should be grateful for the work he has done, and that a monitor could do again in future.

“Without us the Government wouldn’t have proceeded to try to bring about the reforms, because they knew that politically they weren’t on unless the public was completely convinced that the benefit would be passed on in lower prices,” he says.

“Had the reform finally gone through I would have asked the industry to come out and congratulate me for our excellent efforts and to have shown the appreciation I know they must feel in their hearts.

“Alas, the deferment of the tax reform means that we won’t have that opportunity.”

So will reform on the ESL, and other insurance taxes finally go through?

The case has never been stronger, thanks at least in part to Professor Fels’ intervention and the latest reports from government-appointed expert groups. NSW Treasurer Dominic Perrottet is also making determined noises on large-scale reform.

However, there is the distraction of a global pandemic and the fact that wider changes to the tax system – of which insurance taxes are just one part – may have powerful opponents.

In a recent release ICA acknowledged these issues – but once again emphasised the benefits.

“We know tax reform is a big ask at present,” Chief Executive Rob Whelan says. “However, we believe updating the tax system will help reduce pressure on consumers as we work to address the impacts of COVID-19 on our economy.”