What is the Home Building Compensation Fund?
What is the Home Building Compensation Fund?|
Under the Home Building Act 1989, builders must take out insurance under the Home Building Compensation Fund (HBCF) for any residential building work in NSW valued at over $20,000. This insurance provides a last-resort safety net for a homeowner if their builder cannot complete residential building work or fix defects, due to their insolvency, death or disappearance or if their licence is suspended for failure to comply with a tribunal or court money order.
The NSW Government has been the sole provider of cover under the HBCF since 1 July 2010, through icare (formerly known as the NSW Self Insurance Corporation - SICorp). The State Insurance Regulatory Authority (SIRA) has regulated the scheme since September 2015, working closely with NSW Fair Trading.
What are the problems with the current fund? Why does it need reforming?
In its current form, the HBCF is not financially sustainable, and without reform this will compromise its ability to protect homeowners. Premium prices have not kept pace with the claims experience of the fund and current pricing does not cover claims costs and other fund expenses. To remain viable, any insurance scheme must charge a price for premiums which is sufficient to cover costs.
Right now, HBCF costs (claims and running costs) substantially exceed its income which is primarily drawn from premiums. As at 30 June 2015, the HBCF was $293.8 million in deficit – an increase of 43 per cent – up from $204.8 million on 30 June the previous year. Unless the scheme is significantly reformed, it will not be able to protect home owners into the future.
What stays the same?
Home Building Compensation protection will continue to be mandatory and provide last-resort cover for incomplete and defective residential building work worth over $20,000. This includes low-rise multi-units (less than three storeys). The insurance coverage periods will also stay the same (six years cover for major defects and two years for all other defects) and every project will continue to have cover for both non-completion and defects.
What is changing?
Broker commissions will be phased out
The guaranteed commissions currently paid to brokers will be removed by early 2017, eliminating 15 per cent of the current cost of a policy.
Builder risk will inform premium pricing
Premium prices will better reflect a builder’s level of risk, resulting in high-risk builders paying a higher premium, and low-risk builders paying a lower premium.
Split cover will be made available
Home Building Compensation insurers will be able to offer a split cover product with $340,000 cover for non-completion as well as $340,000 cover for defects. However, the cover will still be offered as a $340,000 combined cover product for both non-completion and defects.
Premiums will be sustainably priced
The shortfall between the scheme’s costs and what is received through premiums is currently covered by the NSW Government. This subsidisation of premiums will be removed and over time premiums will be increased to ensure they meet the expected costs of future claims.
Allowing private providers to re-enter the market
The reforms will establish a framework to allow private providers to re-enter the market and offer Home Building Compensation products that meet or exceed the minimum consumer protections provided by the scheme. This will allow regulated competition and may provide builders with a greater choice of products.
SIRA will monitor the effectiveness of these reforms to ensure they are sustainable.
What is risk-based pricing?
The introduction of risk-based pricing means builders will be offered premium prices that reflect their business’ individual level of risk. This will potentially reduce the subsidisation of higher-risk builders by their lower-risk counterparts. It will also provide an incentive for builders to reduce their risk in return for lower insurance premiums, while providing better price signalling to homeowners, allowing them to make more informed decisions when it comes to choosing a builder.
Why are non-completion and defect risks priced differently?
Incomplete work and defective work have different coverage periods, and different requirements for making a claim. Non-completion claims are generally made within a couple of years after a Home Building Compensation policy has been issued and are usually finalised more quickly. Defect claims are often lodged a number of years after completion of building work, making their risks harder to assess and price.
Allowing non-completion and defect protection to offered as a split cover product enables the specific risks associated with each to be better assessed and managed, without compromising coverage for homeowners.
Why are broker commissions being phased out?
Broker commissions are an unnecessary additional cost for a mandatory product. Removing broker commissions brings Home Building Compensation in line with the NSW workers compensation scheme which does not charge broker commissions. Instead brokers will be free to charge builders competitively set fees.
When will the reforms be implemented?
Reforms to Home Building Compensation will be implemented in stages during 2016-18. In early 2017 it is expected that legislation will be introduced to Parliament to give effect to a number of proposed reforms, and risk-based pricing and the removal of guaranteed broker commissions will commence at this time. Further information regarding the roll-out of the Home Building Compensation reforms will be released in the coming months.
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