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What reform means for insurers and providers

The reforms will create an opportunity for private sector insurers and alternative indemnity providers to enter the home building compensation market.

What won't change

Home building compensation cover will remain a compulsory product for builders and tradespeople that contract to do residential home building work in NSW costing more than $20,000, such as new home construction (including multi-unit buildings of three storeys or less) or home renovations.

As a minimum, it must cover homeowners if their builder cannot complete building work or fix defects because they have become insolvent, died, disappeared or had their licence suspended for failing to comply with a court or tribunal order to compensate a home owner.

What will change

Market opens to private sector

Private insurers or alternative indemnity product providers will be able to apply to us (the State Insurance Regulatory Authority) for a licence to enter the home building compensation market alongside the government provider, icare hbcf *.

Applicants will need to satisfy prudential or other conditions to be licensed.

* icare hbcf provides home building compensation on behalf of the government's own licensed insurer, SICorp.

Products, premiums and eligibility to be regulated

Licensed insurers and providers will need to apply to us to obtain approval of:

  • home building compensation products that may be offered in NSW
  • the premiums they intend to charge. SIRA will approve or reject the premiums after
    considering whether they cover the relevant risks and are not excessive or inadequate.

SIRA will independently set the builder eligibility standards that all providers, including icare hbcf, must use. We will consult with the building and insurance industries before deciding what these eligibility standards will be.

Scheme costs to be covered

All licensed insurers and providers, including icare hbcf, will contribute to the costs of regulating the scheme. We will administer two new funds:

  • the Home Building Operational Fund to cover the costs of administering the scheme; and
  • the Home Building Insurers Guarantee Fund to be held against the risk of a licensed insurer or provider becoming insolvent.

Level playing field for all providers

The reforms support private sector participants being able to compete for market share on an equal footing with icare hbcf.

icare hbcf is adjusting its premium pricing to ensure it provides for expected future claims and costs. icare hbcf will be subject to regulatory oversight by SIRA in a similar way to private insurers and providers that enter the market.

Like private sector participants, icare hbcf must apply to us for approval of its premiums. icare hbcf will also have to contribute towards the costs of the scheme in the same way as private sector participants.

The reforms will allow alternative indemnity product (AIP) providers, such as fidelity fund schemes, to enter the market in addition to APRA-authorised insurers. These products and providers will be subject to equivalent requirements to insurance products and insurers under the home building compensation scheme.

AIPs will need to provide the same minimum level of cover as insurance providers under the scheme. AIP providers will need to apply to us for a licence, and will have to satisfy prudential and other requirements. AIP providers will also need to contribute to the cost of regulating the scheme.

A variety of products may be offered

Providers will be encouraged to offer innovative products, which must meet minimum standards, but may include other features. For example, providers may offer products that:

  • cover additional risks, or
  • allow claims in additional circumstances (such as ‘first resort’ products), or
  • include services such as quality assurance checks of work, or management of progress payments or dispute assistance.

It will be up to insurers and providers to decide whether to offer additional features and what they will include in their products.

There will be two types of cover

Providers licensed to operate under the scheme may offer one or two types of cover.

1. Combined cover (current product)

A minimum of $340,000 in combined cover will continue to be available for:

  • non-completion*; and
  • defects within the statutory warranty period.

2. Split cover (new option)

Split cover is a new way that cover can be offered to builders.

It separates the cover into two products:

  • construction period cover that helps consumers complete their home and deal with any associated defects in incomplete work; and
  • warranty period cover that helps home owners deal with any defects after the work is complete.

For each home building project, the builder must have both split cover products before starting work or accepting payment.

Under split cover, the total cover for the home owner is doubled to a minimum of $680,000, including:

  • construction period cover, with a minimum of $340,000 for the risks of non-completion* and associated defects during construction
  • warranty period cover, with a minimum of $340,000 for the risks of defects after completion.

* Cover for non-completion is only required to cover the deposit if no work has started or 20 per cent of the contract price for partially completed work.

Licensed providers may offer any or all of the types of cover. However, builders must always buy either a combined cover product or both types of split cover for every building project.

Licensed providers may offer any or all of the types of cover. However, builders must always buy either a combined cover product or both types of split cover for every building project.

When will the reforms be implemented?

The NSW Parliament has passed laws needed to implement the reforms.

We are designing the details for how the new scheme will operate. We have been consulting industry and other stakeholders during the second half of 2017 about new guidelines and regulations to support the scheme.

Insurers and providers will be able to apply to us for a licence to sell home building compensation products in 2018.

You can access information and data reports about the current scheme from our website.

If you want to register your interest, please email us at hbcfreform@sira.nsw.gov.au

Further information

The reforms to home building compensation will complement administrative changes that are being made by the government’s home building compensation insurance provider icare hbcf,  as well as other reforms across the building industry, including: