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Reforms

The NSW Government is reforming the Home Building Compensation Fund to improve consumer protection, improve competition in the market and make the scheme sustainable for the NSW home building sector.

Under the Home Building Act 1989, builders must take out insurance under the Home Building Compensation Fund (HBCF) for any residential building work in NSW valued at over $20,000.

This insurance provides a last-resort safety net for a homeowner if their builder cannot complete or fix defective residential building work, due to their insolvency, death, disappearance or if their licence is suspended for failure to comply with a Tribunal or Court money order.

The NSW Government has been the sole provider of cover under the HBCF since 1 July 2010, which was formerly called ‘Home Warranty Insurance’, however some people may also call it ‘home owners warranty insurance’, ‘builders warranty insurance’, or ‘builders indemnity insurance’.

HBCF is currently marketed under the name icare hbcf and regulated by the State Insurance Regulatory Authority (SIRA) in partnership with NSW Fair Trading.

The fund has lost $95 million since 2013 and is accruing unfunded liabilities at a rate of more than $1.7 million a week and change is needed to help drive long-term affordability and sustainability.

Under the new arrangements the home building compensation insurance market will be open to regulated competition, allowing private insurers to enter the market and provide consumers with a greater choice of insurance product.

SIRA will oversee the home building compensation scheme and approve premiums, issue market practice and claim handling guidelines, and enforce licence conditions.

Q&As

What is the Home Building Compensation Fund?

Under the Home Building Act 1989, builders must take out insurance under the Home Building Compensation Fund (HBCF) for any residential building work in NSW valued at over $20,000.

This insurance provides a last-resort safety net for a homeowner if their builder cannot complete residential building work or fix defects, due to their insolvency, death or disappearance or if their licence is suspended for failure to comply with a tribunal or court money order.

The NSW Government has been the sole provider of cover under the HBCF since 1 July 2010, through icare (formerly known as the NSW Self Insurance Corporation -SICorp). The State Insurance Regulatory Authority (SIRA) has regulated the scheme since September 2015, working closely with NSW Fair Trading.

Why is reform needed?

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

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. To remain viable, any insurance scheme must charge a price for premiums which is sufficient to cover costs.

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

As at 30 June 2015, the HBCF was $293.8 million in deficit – an increase of 43 per cent – up from $204.8 million on 30 June the previous year. Unless the scheme is significantly reformed, it will not be able to protect home owners into the future.

What will stay the same?

Home building compensation protection will continue to be mandatory and provide last-resort cover for incomplete and defective residential building work worth over $20,000. This includes low-rise multi-units (less than three storeys).

The insurance coverage periods will also stay the same (six years cover for major defects and two years for all other defects) and every project will continue to have cover for both non-completion and defects.

What is changing?

Broker commissions will be phased out

The guaranteed commissions currently paid to brokers will be removed by early 2017, eliminating 15 per cent of the current cost of a policy.

Builder risk will inform premium pricing

Premium prices will better reflect a builder’s level of risk, resulting in high-risk builders paying a higher premium, and low-risk builders paying a lower premium.

Split cover will be made available

Home building compensation insurers will be able to offer a split cover product with $340,000 cover for non-completion as well as $340,000 cover for defects.

However, the cover will still be offered as a $340,000 combined cover product for both non-completion and defects.

Premiums will be sustainably priced

The shortfall between the scheme’s costs and what is received through premiums is currently covered by the NSW Government.

This subsidisation of premiums will be removed and over time premiums will be increased to ensure they meet the expected costs of future claims.

Allowing private providers to re-enter the market

The reforms will establish a framework to allow private providers to re-enter the market and offer home building compensation products that meet or exceed the minimum consumer protections provided by the scheme.

This will allow regulated competition and may provide builders with a greater choice of products.

We will monitor the effectiveness of these reforms to ensure they are sustainable.

What is risk-based pricing?

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, allowing them to make more informed decisions when it comes to choosing a builder.

Why are non-completion and defect risks priced differently?

Incomplete work and defective work have different coverage periods, and different requirements for making a claim.

Non-completion claims are generally made within a couple of years after a home building compensation policy has been issued and are usually finalised more quickly.

Defect claims are often lodged a number of years after completion of building work, making their risks harder to assess and price.

Allowing non-completion and defect protection to be offered as a split cover product enables the specific risks associated with each to be better assessed and managed, without compromising coverage for homeowners.

Why are broker commissions being phased out?

Broker commissions are an unnecessary additional cost for a mandatory product.

Removing broker commissions brings home building compensation in line with the NSW workers compensation scheme which does not charge broker commissions.

Instead brokers will be free to charge builders competitively set fees.

What consultation did the Government conduct prior to making these decisions?

In December 2015, NSW Fair Trading released the Reform of the Home Building Compensation Fund discussion paper, which canvassed potential reform options to ensure the HBCF achieves financial sustainability so it can continue to protect homeowners in the future.

Reform options included operational and administrative changes, as well as changes to the builder licensing system.

A total of 775 survey responses and 74 written submissions were received from a range of stakeholders, including builders, building industry associations, consumer protection associations, the insurance and property industries, lawyers and government departments.

This feedback informed the final package of reforms for home building compensation.

How will the reforms better protect people who are building or renovating their homes?

Without reform, the HBCF would not be able to meet the expected costs of future claims, and would therefore be unable to protect home owners when their builder cannot complete/repair their building work, leaving them out of pocket.

The reforms will ensure the financial sustainability of the HBCF. This means it can continue to protect consumers should their builder fail to complete residential building work or fix defects due to insolvency, death, disappearance or licence suspension.

As home building compensation insurance costs are often passed on to the home owner, risk-based premium pricing will offer better price signalling to consumers, allowing them to make a more informed decision when choosing their builder.

When will the reforms be implemented?

Reforms to home building compensation will be implemented in stages during 2016-18.

In early 2017 it is expected that legislation will be introduced to Parliament to give effect to a number of proposed reforms, and risk-based pricing and the removal of guaranteed broker commissions will commence at this time.

Further information regarding the roll-out of the home building compensation reforms will be released in the coming months.

Where do I go for more information?

If you would like to receive updates about the home building compensation reforms as they progress, please email your details to consultation@sira.nsw.gov.au.