LMI Group’s Managing Director, Prof. Allan Manning was mortified to see that the only response that the Insurance Council of Australia made to latest news on the fire service levy was to applaud the news. see http://www.insurancecouncil.com.au/media/89752/010512-victorian-budget-fsl-final.pdf

In response he wrote in his blog:

To my mind this press release completely misses the boat. Let me explain why:

  1. It was the Brumby Government under pressure from the Victorian National Party following the Victorian Black Saturday Royal Commission, and campaigns such as that mounted by www.NoTaxOnInsurance.com.au, Insurance News, Insurance News Australia, NIBA, Zuich Insurance and a great many individuals within the Insurance Industry that announced the removal of fire service levy back on 27th August 2009 and not this current Baillieu Government.
  2. For this, the 2011/2012 period the Fire Service Levy imposed on the insurance industry went up by nearly $100 million from $544.2 million in 2010/2011 to a revised $641.9 million for 2011/2012.
  3. The expected Fire Service Levy for 2012/2013 is a further $580.5 million.
  4. The reason for the increase is that this government pushed through $250 million (1/4 billion dollars) of capital expenditure in full to the Insurance Industry before it moves to property rates. The benefit of this capital expenditure will benefit all Victorians for 20+ years and yet the Insurance Industry through the prudent and risk adverse have met the full cost.
  5. Despite Queensland, South Australia and Western Australia all realising the need to pro-rata the transition of fire service levy between the outgoing tax on insurance and the property tax, the Baillieu Government are saying that the Insurance Industry has to meet the full cost.
  6. The Victorian Government refuse the Insurance Industry to work together to work out a uniform approach to solve the major problem. (I wonder if the Victorian Government will take the same approach to the local governments. I doubt it – the policitical back lash would be too great.)
  7. Let us not forget the Baillieu Government delayed the removal of the insurance based Fire Service Levy by 12 months!
  8. The government have had since August 2009 to work this out and could have (should have) followed the working success of the transitional arrangements used by Queensland, South Australia and Western Australia) but only give the Insurance Industry less than 1 month to sort it out.

It is point 5 that is causing the greatest grief to the Insurance Industry including the insurance companies that the ICA claims to represent.

Let me explain why. We all know that everyone in the community’s insurances do not fall due equally each month. There is still a cluster around the end of each quarter with 30 June the busiest time, particularly for business insurance.

The situation is made more complicated by different rates charged for Insured’s in the Metropolitan Fire Brigade area as opposed to the Country Fire Authority area. On top of this there is a higher rate for commercial, business interruption and contract works than there is for home and contents.

Yet another complication is that the amount each insurer pays is based on their market share for the product at the end of the period not at the start. No one can forecast their market share with 100% accuracy.

Let us ignore all these complications and for the sake of simplicity, let us assume that insurances did fall due equally each month and that people paid their rates each quarter. This means that if $580,000,000 is be collected the Insurance Industry need to collect $48,333,333 per month for 12 months.

If the Victorian Government had said in this year of transition: right insurance industry we need half from you ($290,000,000) and we need half from property owners ($290,000,000) through rates then it would be a realitively simple exercise to divide the monthly figure by 12 and the pro-rata the number of months the Insured is expected to meet the fire service levy. That is 11.5 months for July 2012 renewals down to .5 for June 2013 as set out in the following table: 

Total Amount to be Collected by Insurance
Portion collected by Insurance Industry
Portion to be collected from Property Rates
Total Collected
 $        48,333,333
 $                  46,319,444
 $                   2,013,889
 $   48,333,333
 $        48,333,333
 $                  42,291,667
 $                   6,041,667
 $   48,333,333
 $        48,333,333
 $                  38,263,889
 $                 10,069,444
 $   48,333,333
 $        48,333,333
 $                  34,236,111
 $                 14,097,222
 $   48,333,333
 $        48,333,333
 $                  30,208,333
 $                 18,125,000
 $   48,333,333
 $        48,333,333
 $                  26,180,556
 $                 22,152,778
 $   48,333,333
 $        48,333,333
 $                  22,152,778
 $                 26,180,556
 $   48,333,333
 $        48,333,333
 $                  18,125,000
 $                 30,208,333
 $   48,333,333
 $        48,333,333
 $                  14,097,222
 $                 34,236,111
 $   48,333,333
 $        48,333,333
 $                  10,069,444
 $                 38,263,889
 $   48,333,333
 $        48,333,333
 $                    6,041,667
 $                 42,291,667
 $   48,333,333
 $        48,333,333

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