Insurance costs on commercial property could be hit with substantial increases if the government accepts the recent Fire and Emergency New Zealand (Fenz) funding model review.
It is proposed that the costs to be charged by Fenz will be increased significantly and based on the total policy sum insured, which, in most cases, is the replacement cost of the property.
The actual value of the property has been the basis since these levies were introduced in 1975 so this will leave owners of older buildings, particularly, facing a significant cost increase if the buildings are currently insured for replacement value. Policies covering residential buildings and contents also contribute by way of a levy which will reduce slightly.
However, the levies charged on cars and light commercial vehicles are also set to increase by about $30.
Fenz is often the first responder to motor accidents, so it is appropriate that owners of motor vehicles contribute in some way towards this service, but why is it only prudent vehicle owners who arrange full insurance cover on their vehicles are paying? People with no insurance cover get the service for free.
The Crown contributes only about 3% of the overall costs to fund all the services provided by Fenz. But structure fires or emergencies represent are only part of their overall activities, so we must question why the insurance industry is required to charge their building clients to cover all the costs when many of the activities undertaken by Fenz have no connection to insurance on buildings or their contents.
Furthermore, if the Fenz service is available for all, why is it that a sector of society can get their service without contributing to it?
Prior to 1975, the funding was made through a portion of property rates which were levied by councils to fund local fire boards.
Insurance companies also contributed to the overall fire service cost through a separate charge. When the fire service levy was introduced, the funding shifted to the policy holder, but this model is now clearly getting out of hand.
This, coupled with local body and regional council property rates increases, could mean many businesses find themselves financially distressed.
Insurers have been reverting to risk-based premium charges which, in many cases, have resulted in substantial increases in insurance premiums in recent years, and this increased levy could make the whole insurance equation unaffordable for many commercial property owners and their tenants.
The added cost also distorts the true cost of the actual insurance risk. Building owners may be forced to reduce their sum insured to save money, potentially leaving them in conflict with their insurer’s policy terms.
What is more, Fenz could inevitably earn significantly less income than it is expecting under this proposed change in the funding model, if the sums insured on commercial property decrease.
It was never imagined that commercial insurance policy contracts could evolve to the point that they might be taken advantage of by authorities to levy unreasonable taxes on unsuspecting property owners.
The purpose of this Fenz funding review was to determine a fair and equitable funding process for all, but I fail to see how this proposed model comes anywhere near being fair or equitable.
It is clearly time for a major rethink on how Fenz is funded.
— Alan Race is a retired insurance director with Crombie Lockwood (NZ) Ltd (now Gallaghers).
