HBCF Reforms

In November 2016, NSW Government made an announcement outlining reforms to the Home Building Compensation Fund (HBCF). In its current form, HBCF insurance is not financially sustainable. Without reform this will compromise its ability to protect homeowners now and into the future. Premium prices have not kept pace with the insurance claims experience of the Fund and current pricing does not cover claims costs and other related expenses.

HBCF insurance claims and running costs are substantially exceed its income which is primarily drawn from premiums. Based on actuarial estimates, as at 30 June 2016, the HBCF insurance scheme was $375.8 million in deficit. This is an increase from $293.8 million on 30 June 2015. To remain viable, any insurance scheme must charge a price for premiums which is sufficient to cover costs. Unless the scheme is significantly reformed, it may not be able to protect homeowners.
 
The reforms include changes to premiums over the next two years to ensure the scheme's sustainability and the introduction of risk based pricing, so that premiums better reflect a building contractor's individual level of risk. HBCF has commenced implementing the reforms through a series of changes from 3 April 2017.

Premium Pricing 

Insurance premium increases needed to restore the Fund to a sustainable basis and are phased over 2 years. The shortfall between the Fund’s costs and what is received through premiums is currently covered by the NSW Government. First change came into effect on 3 April 2017. 
 
The subsidisation of premiums has been removed and premium has been increased to ensure they meet the expected costs of future claims. As an example, single dwelling premium no longer subsidise multi-unit premiums. 
 
The introduction of risk-based pricing means builders will be offered premium prices that reflect their business’ individual level of risk. Premium prices better reflect a building contractor’s level of risk, resulting in high-risk contractor paying a higher premium, and low-risk contractor receiving a discount. 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. More information about premium pricing changes can be found here

Broker Commission paid by icare

Reforms recommended changes to the way broker commission by HBCF is paid. Government paid broker commission is considered an unnecessary cost for a mandatory monopoly product. This change will bring the HBCF hbcf in line with the icare’s Workers Insurance Scheme which does not pay broker commission in addition to the fee they charge from their clients.
 
Brokers have adopted a fee-for-service model where they charge builders with competitively set fees. Builders are not expected to pay a higher cost towards their premium due to this change in commission to their brokers. Also the broker's fee will be separate to the premium paid for HBCF insurance and brokers will decide how much they charge for their services independently. The fee a builder pay is a matter between the broker and their builder clients. 

Digital Portal

icare has launched a Digital Builder Self-Service Portal for building contractors to use. A user friendly, easy to use portal provides the builders an opportunity to view at a glance their Eligibility limits, profile limits, policy information, download Certificates of Eligibility, lodge new policy applications and close open jobs. Registration information sheet for builders can be downloaded here

FAQs

In its current form, HBCF insurance is not financially sustainable, and without reform this will compromise its ability to protect homeowners now and into the future.

  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.

  Right now, HBCF insurance claims and running costs are substantially exceed its income which is primarily drawn from premiums.

Based on the actuarial estimates, as at 30 June 2016, the HBCF insurance was $375.8 million in deficit. This is an increase from $293.8 million on 30 June 2015.

To remain viable, any insurance scheme must charge a price for premiums which is sufficient to cover costs. Unless the scheme is significantly reformed, it will not be able to protect homeowners now and into the future.

  The HBCF insurance will continue to be mandatory and provide cover for incomplete and defective residential building work with a contract value over $20,000.

  The protection applies where a builder has been unable to honour commitments under the building contract with a homeowner due to insolvency, death or disappearance.

  Cover is also provided where the builder’s licence has been suspended for failing to comply with a Tribunal or Court order to pay compensation to the homeowner.

  The cover is available for residential building work valued over $20,000 for single dwelling, Duplex, Dual Occupancy, Swimming Pools, low-rise multi-units (less than four storeys) and high-rise multi-unit (four or more storeys) renovations, alterations & additions, etc.

  The insurance coverage periods will also stay the same i.e. six years for major defects and two years for general defects.

  Broker commissions by icare: The guaranteed commissions of 15% currently paid to brokers by HBCFhas been removed, reducing 15% of the current cost of a policy.

  Builder risk based premium pricing: Premium prices better reflect a building contractor’s level of risk, resulting in high-risk contractor paying a higher premium, and low-risk contractor receiving a discount.

  Premiums sustainably priced: The shortfall between the Fund’s costs and what is received through premiums is currently covered by the NSW Government. This subsidisation of premiums has been removed and premiums has been increased to ensure they meet the expected costs of future claims.

  Cross subsidies between types of products: As an example, single dwelling premiums will no longer subsidise multi-unit premiums.

  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.

Premium rates have not kept pace with the claims experience of the icare hbcf, having not increased since July 2010, when the scheme commenced under the NSW Government. It was necessary for premiums to be increased to ensure they meet the expected costs of future claims. The price changes have commenced on 3 April 2017 and further increases will be introduced gradually over 2 years (until late 2018).

Previous rates have changed when the contract price exceeds $1 million. The amount exceeding $1 million is charged at 0.2%. (ie for a $1.2m contract the rate of 0.2% would be applied to the $200,000 only).

Based on claims evidence and the rerating of different construction types, the new premiums commenced from 3 April 2017 no longer apply a change in rates above $1 million.

All projects have the base rate for that construction type and location applied to the entire contract value.

In its current form, HBCF Insurance is not financially sustainable, and without reform this will compromise its ability to protect NSW homeowners. Premium prices have not kept pace with the claims experience of the Fund. To remain viable, any insurance scheme must charge a price for premiums which is sufficient to cover costs. Right now, icare hbcf costs (claims and running costs) substantially exceed its income which is primarily drawn from premiums.

Based on actuarial estimates, as at 30 June 2016, the HBCF Insurance was $375.8 Million in deficit, an increase from $293.8 Million on 30 June 2015. Unless the scheme is significantly reformed, it will not be able to protect homeowners into the future.

Unless the scheme is significantly reformed, it will not be able to protect homeowners now into the future. Since 1 July 2002, over 4,800 claims have been made with payouts averaging $64,800 per claim. The average insurance premium cost is currently $1,447.

By law, builders or contractors must buy HBCF insurance for each residential building project valued over $20,000 in NSW with certain projects exempted (e.g. new high-rise constructions over 4 storey).

HBCF Insurance provides a safety net for homeowners and subsequent purchasers, if their builder or contractor cannot complete residential building work or fix defective work due to insolvency, death or disappearance. Safety net is also provided where the contractor licence is suspended by NSW Fair Trading for failure to comply with a money order by Court or Tribunal.

The Brokers will decide how much they charge for their services independently. This is a matter between the Broker and their builder clients.

A service fee is added to the premium by the broker rather than a commission paid by the Fund, However, the fee Broker charged is separate to the premium paid for HBCF insurance. Builders are not expected to pay a higher cost due to this change in commissions to their brokers.

Risk-based pricing and the removal of guaranteed distributor commission has commenced on 3 April 2017. Further Reforms will be implemented in stages during late 2017 and early 2018.

SIRA (State Insurance Regulatory Authority) will monitor the effectiveness of these reforms to ensure they are sustainable.

NSW Fair Trading released the Discussion paper and the public consultation had commenced in December 2015 and concluded on 12 February 2016. View the submissions received in response to the public consultation on the reform of the Home Building Compensation Fund.

You will need to contact your broker with any enquiries in relation to the changes in the first instance.

For general enquiries or any operational questions, contact icare hbcf between 9 am to 5 pm on 02 9216 3224 or enquiries.hbcf@icare.nsw.gov.au