After downloading the Victorian Government’s Green Paper, you could be forgiven for thinking that much of it was drafted by Sir Humphrey Appleby from Yes Minister in order to justify the current tax system and to set up the community to accept that what we currently have is the best possible alternative and we should all be happy with more of the same.
The proposals suggesting that the government legislate for compulsory fire or property insurance will be very unpopular with sections of the community. I think we all accept that this is not going to happen. Even if it did, where does business interruption insurance fall into this? Not one single business that I personally assisted following the bushfires, either in a voluntary capacity or for an Insured, have elected to remain in business following the fire. The reason: no, or completely inadequate, business interruption insurance. In every single case when I asked why they did not have more cover, the answer I got was: the high cost of insurance! Many of these establishments were the draw card businesses for the area and their loss will affect the whole community. It is on this experience that I question the accuracy of the statistics on uninsured and under-insured properties quoted in the Green Paper, but that is a separate issue that the Insurance Council of Australia will no doubt cover in their submission.
Other suggestions put forward in the State Government’s Green Paper are that those who do not insure or, do not insure fully, will be taxed separately. This, in reality, is completely uneconomic and, in my mind, unworkable. Victorians would rightly object to pay for the administrative machine that would be needed to perform this role pre-loss. The money collected needs to go towards funding emergency services, not to bureaucracy. If it were to be charged after the loss, no government is going to allow invoices to go out to people or businesses that have lost everything. It would be politically very unpopular. I know of no uninsured home or business owner that received an invoice for fire service charges following the Victorian ‘Black Saturday’ bushfires, despite current legislation allowing this.
Even the 6th and final proposal for a broad property tax stresses that the tax levied will be risk based. How will this be determined? By individual inspection? By industry classification, construction, location, fire protection or a mixture of all? How will this information be collected and updated? Will it take into consideration that 16% of call outs are for grass fires where there is no property involved?
The Green Paper refers to an office risk versus a fish and chip shop. I really do not think that the bushfire distinguishes between the two occupations. The Victorian Premier has been widely quoted as saying that the emphasis of the fire services in a major bush fire will be to protect life not property. How does a risk-based property tax address this fairly? Once again, on the administration front, what a bureaucratic nightmare! Sir Humphrey will have a much bigger department!
Why does Victoria have to reinvent the wheel? This issue has already been addressed by several other Australian State Governments and governments around the world, starting with the United Kingdom. A tax included in the rates spreads the cost of emergency services most equitably and, in the least costly form, across all of the community. That is the simple, cost effective, and fair solution.
Under the current method, the fire service tax has increased 110% from 40% to 84% on insurance premiums on commercial businesses in rural Victoria since 2006. This now means with the triple tax effect, that a $1,000 premium that goes to the insurer is loaded by an additional $1,226.40. Let us put this into perspective, out of their share, the insurer has to pay salaries, rents, and the biggest expense, claim settlements. The insurance industry in Australia last year paid out $17.8 billion in claims. This has a huge spin off effect on the whole community. The irony is that fire claims are only the third highest cause of property losses after storms and floods.
You do not need to be a top government economist to know that if you more than double the cost of a product or service, people buy less. This is the reasoning used by the federal government to justify increasing the tax on alcopops.
But unlike alcohol or tobacco, insurance does not hurt anyone in the community or put pressure on the State Government’s health or any other department. On the contrary, it is good for the government, the economy and the entire community if people have adequate insurance.
The reality is that the existing system is unfair and unreasonable. It imposes the biggest burden on the prudent and risk-averse. While those that suffer a loss during a disaster do receive some benefits outside insurance due to the generous contributions of the Australian public, it does not stop businesses failing, nor does this help a family or business that suffer a fire outside of a natural disaster.
Like many others, I will prepare a submission based on my experience (excluding the emotion that I have shown here), covering all these issues and in return, I hope the State Government shows statesmanship and fixes what is currently a terrible system that is adversely affecting the Victorian economy.
If this is genuine, I applaud the Victorian Government for at least opening up the debate. However, I do urge all members of parliament and the community to look at funding of the emergency services with an open mind and not allow this process to merely be part of the ‘12-stage delaying process’ described by Sir Humphrey in the Yes Minister episode, ironically titled, The Smoke Screen:
- Informal discussions
- Draft proposal
- Preliminary study
- Discussion document
- In-depth study
- Revised proposal
- Policy statement
- Strategy proposal
- Discussion of strategy
- Implementation plan circulated
- Revised implementation plans
- Cabinet agreement
We are now at Step 4, remembering that a Green Paper by definition is not binding on a Government to do anything different. Is it coincidence that there is a State election due before the end date for discussion?
We have a long way to go to win this fight, but loosely quoting, not Sir Humphrey, but a genuine Sir and great politician, Sir Winston Churchill: “I do not believe that this is the end, nor even the beginning of the end, but perhaps it is the end of the beginning””.
About the Author
Dr Allan Manning
DBA, MBA, B.Com, MBA, FCPA, ANZIIF (Fellow) CIP, FCII, FCILA, FUEDI
CEO, LMI Group
For nearly 40 years, Dr Allan Manning has managed large and complex losses involving major property, business interruption, fidelity, construction and liability throughout Australia, Asia Pacific, Europe and North America. He founded the LMI Group in early 1999; a firm dedicated to providing high-level technical expertise in pre- and post-loss insurance services. This includes claims preparation and a number of on line knowledge based services such as LMI PolicyComparison, LMI BICalculator, LMI RiskCoach and the business continuity management system, LMI ContinuityCoach.
As one of Australia’s most academically qualified insurance professionals, Allan has lectured at RMIT and Victoria Universities and has delivered over 500 seminars on insurance topics. He holds the post of Research Fellow with Victoria University’s Business & Law Graduate School of Corporate Governance, and is the author of nine books on insurance, including Business Interruption Insurance & Claims and Understanding the ISR Policy.