One of the biggest challenges facing the general insurance market at present is how to achieve a pragmatic solution for collecting the new Fire and Emergency New Zealand (FENZ) levies.
Changes to the fire service introduced last year resulted in a merger of the urban and rural services. This came with considerable merger costs all of which will be ultimately borne by those who buy property insurance.
A new levy regime has been proposed which includes moving the levy to all property insurance rather than just fire covers. Also, sources of revenue other than insurance were discontinued.
Over the last 15 months various stakeholders including government, FENZ, the Insurance Brokers Association (IBANZ) and the Insurance Council (ICNZ) have been working on how the new regime will work. What this has proved is that applying a levy to a complex market such as insurance has the potential to create a compliance nightmare.
To be effective a levy should be simple to calculate, easy to apply and cost effective to collect. As many countries around the world have found an insurance levy fails to meet these criteria.
Insurance is an ever-changing product responding to the needs of a dynamic market place. The levy on the other hand is a concept dating back centuries to when fire insurers created their own fire brigades to protect the property they insured.
This link between insurance and funding continued when governments took over the brigades. However, most jurisdictions have since moved on having realised this funding model is inherently inefficient and unfair. Regrettably New Zealand has ignored the obvious.
What is perhaps even more regrettable is that our system is in danger of becoming even more inefficient because of the proposed changes to the collection regime. In particular, the approach to applying the levy to any insurance no matter how remotely linked it is to property.
Add to this the desire to charge the levy irrespective of the amount collected and you have a system where costs often far outweigh the benefit.
It would seem illogical to spend $10 to collect $1, but that is the type of scenario we face. This is because of the missing link wherein those receiving the levy do not pay the collection costs. If the beneficiaries of the income have no skin in the collection game there is no real incentive to make it cost effective.
The FENZ levy is collected by the insurance industry which receives no real compensation for the cost of doing so. These latest changes mean insurers and brokers will be required to spend tens of millions of dollars on system upgrades for no return to their businesses.
Ultimately it will be the insured which gets a double whammy, the levy cost and exorbitant collection costs. To rub salt into the wound they are also subsidising freeloaders who pay nothing but still receive the full FENZ service.
If we are to remain trapped in the past with a fundamentally flawed and discredited funding system we should at the very least minimise the cost for those who act responsibly and manage risk. This must be a top priority if insurance is to remain affordable and fulfil its role in protecting New Zealanders.
