Reform Announcement

On 3 November 2016, Minister for Better Regulation, the Hon. Victor Dominello made an announcement outlining reforms to the Home Building Construction Fund (HBCF). 

You can download a copy of the media release here and SIRA's recommendations.

Why the Scheme needs reforming?

In its current form, icare 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 insurance claims experience of the fund and current pricing does not cover claims costs and other related expenses. 

Right now, icare 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 of 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.

icare's response to HBCF Reforms

icare has commenced undertaking a series of operational changes in response to the recently announced HBCF reforms. 

Risk Based Pricing

The introduction of risk-based pricing means building contractors are offered premium prices that reflect their individual level of risk. This will reduce the subsidisation of higher-risk contractors by their lower-risk counterparts.

It has also provided an incentive for building contractors to reduce their risk in return for lower insurance premiums, thus providing better premium price to homeowners.

Homeowners are able to make more informed decisions when it comes to choosing a building contractor because premiums has changed depending on building contractor’s risk profile.

The first rate change to pricing has commenced on 3 April 2017. This included new base rates and the introduction of builder risk based pricing. 

Removal of Broker Commission

icare hbcf has ceased paying commissions to Distributors effective from 3 April 2017. While we realised this will be unpopular with Distributors, Government paid broker commission is considered an unnecessary cost for a mandatory monopoly product. This change has brought the icare hbcf in line with the icare’s Workers Insurance Scheme which does not pay Broker commission. 

Distributors have adopted a fee-for-service model where they now charge builders with competitively set fees.

Their fee will be separate to the premium paid for HBCF insurance. The Distributors decide how much they charge for their services independently and it is a matter between the Distributor and their builder clients. However the fee Distributor charged will be separated to the premium paid for HBCF insurance.

FAQs

In its current form, HBCF 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 insurance claims experience of the fund and current pricing does not cover claims costs and other related expenses.

  Right now, icare 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 into the future.

  icare hbcf continues to provide mandatory cover for incomplete and defective residential building work with a contract price valued over $20,000.

  The protection continues to apply where a builder has been unable to honour commitments under the building contract due to insolvency, death or disappearance. Safety net 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 also stay the same, i.e. six years cover for major structural defects and two years for general defects.

  Broker commissions: The guaranteed 15% commission by icare hbcf previously paid to distributors has been be removed from 3 April 2017. The Distributors now charge a fee-for-services provided to their builder clients. The fee they charge from their client is a matter between the building contractor and their chosen Broker.

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

  Premiums are sustainably priced: The shortfall between the scheme's running costs and what is received through premiums is currently covered by the NSW Government. This support has been removed and premiums has been increased to ensure they meet the expected costs of future insurance claims.

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

  HBCF Reforms has commenced and implemented in stages during 2017-2018.

  Risk-based pricing and the removal of guaranteed distributor commission has commenced from 3 April 2017.

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

The introduction of risk-based pricing means building contractors will be offered premium prices that reflect their individual level of risk.

This has reduced the subsidisation of higher-risk building contractors by their lower-risk counterparts.It will also provide an incentive for building contractors to reduce their risk in return for lower insurance premiums, thus providing better premium price to homeowners.  

Homeowners are able to make more informed decisions when it comes to choosing a building contractors because premiums will change depending on building contractor's risk profile.

  Premiums are currently charged as a fixed percentage of the cost of building work, based on the project type and location.

  Premium rates have not kept pace with the insurance claims experience of the icare hbcf, having not increased since July 2010 when the Government run scheme commenced.

  The price changes will be introduced gradually over 2 years in 2017 and 2018.

 
Previously 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 which commenced from 3rd 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.
 

As part of icare hbcf's commitment to keeping brokers as a valued partner, the letters to all currently eligible building contractors have been sent via their appointed brokers.
 

  icare hbcf has eased paying commissions to Distributors effective from 3 April 2017.

  While it is realised this will be unpopular with some Distributors, Government paid Distributor commission is considered an unnecessary cost for a mandatory monopoly product.

  This change will bring the icare hbcf in line with the icare's Workers Insurance Scheme which does not pay Broker commissions.

  Distributors will instead be able to adopt a fee-for-service model where they will charge builders competitively set Distributor fees. This fee will be separate to the premium paid for insurance under the icare hbcf.

icare hbcf has issued new Distribution Deeds to Insurance Agents for their approved distributors to be executed. 

Please ensure you sign and return the Deed to the insurance agent/s you have an agreement with, without a delay which will enable you to continue to sell the HBCF insurance to your builder clients.

Failing to provide the signed Deed may result in suspension of CIMS access. Your ability to issue project specific certificates may therefore be terminated.

The Distributors will decide how much they charge for their services independently. This is a matter between the Distributor and their builder clients. This fee Distributor charged will be separated to the premium paid for HBCF insurance.

icare hbcf is creating a digital portal as an option for building contractor's to submit project applications, self-manage eligibility and close open jobs online. There is no change in the distribution of insurance through existing insurance brokers. All enquiries will continue to be made through the appointed brokers.

It is anticipated the portal will be ready to be launch by mid 2017.

Brokers need to contact the Insurance Agent in the first instance. Or email enquiries.hbcf@icare.nsw.gov.au Building contractors are encouraged to contact their broker with any enquiries in relation to the reform changes. icare hbcf will also direct enquiries that they may receive from building contractors o respective brokers.

The reforms will establish a framework to allow private providers to re-enter the market and offer HBCF insurance products that meet or exceed the minimum consumer protections provided by the provided by the scheme. This will allow regulated competition and may provide builders with a greater choice of products. For more information please visit SIRA website at the link here.