Changes to home building compensation guidelines
What we are doing
In December 2021, SIRA issued amended guidelines that regulate the eligibility and premium practices of icare HBCF and any future insurers that may join the scheme.
Changes to eligibility
The Independent Pricing and Regulatory Tribunal (IPART) completed a review of the home building compensation scheme in 2020. IPART’s recommendations included reforms to insurance eligibility for the scheme.
The NSW Government has agreed to reforms to reduce the complexity, processing time and cost involved in insurance eligibility for small businesses in the residential building industry. In order to enable those reforms to proceed, SIRA has updated our guidelines, and icare HBCF has committed to filing a new eligibility model to take effect in 2022. SIRA is also making some other updates to the eligibility guidelines.
Summary of key changes
The amendments to the eligibility guidelines will:
- Allow insurers to adopt simplified ‘dollar value’ eligibility limits for businesses (removing the current requirement that eligibilities cap the number of projects and project values that each business may do).
- Require insurers to specify in their eligibility model, any circumstances in which they propose to have the discretion to refuse to insure a project or apply conditions.
- Require insurers to submit defined financial and/or non-financial criteria against which they propose to assess businesses (instead of the current arrangement where the guidelines prescribe the criteria). This enables the use of eligibility criteria that can be simpler and tailored to different classes of businesses.
- Enable insurers to adopt rating tools provided by regulated rating businesses as part of their eligibility model, aligning to the NSW’s Government’s reform agenda for the building and construction industry.
- Allow insurers the flexibility to adopt simplified, continuous eligibility arrangements and greater use of monitoring for some businesses rather than periodic reviews.
- Require insurers to set service standard commitments for insured businesses.
- Omit construction type definitions, which are being addressed in premium guideline changes outlined below.
Changes to premiums
In September 2021, SIRA completed a public consultation about changing how we define different types of construction projects for the purposes of setting premium prices. We received 19 responses from stakeholders via submissions, survey responses or other engagement.
Consultation outcomes:
- All stakeholders either supported or offered no view, about the proposals to stop using land title as a basis for premium setting, and to abolish the current ‘C07 - Other’ category of construction work.
- Most stakeholders supported that SIRA should prescribe the construction types that are used to set premiums rather than icare.
- There were mixed views about whether to price work on existing buildings differently based on whether or not a project involves work on a ‘major element’ of a building. Other views offered by stakeholders included matters such as:
- preferring the current ‘structural or non-structural’ definitions,
- difficulty for insurance brokers to navigate the number and complexity of definitions used (noting some other jurisdictions use fewer categories),
- concern that current definitions narrowly pool some risks, resulting in high prices and disparities between some categories of work, and incentives for some businesses to mis-classify projects to avoid paying the proper premium.
Summary of key changes
We have decided to reduce the number of construction categories, with the expectation that this will make it easier for building industry businesses, brokers and insurers to navigate, and reduce the risk of projects being mis-classified. It will also even out some disparities in premium rates. We will also implement some other general updates. The amendments to the guidelines will:
- Reduce the number construction types to five (currently nine) based on whether work is on a Class 1a building or Class 2 building, and whether work is to build new homes, or work on existing homes, or work relating to a swimming pool.
- Enable insurers to adopt rating tools provided by regulated rating businesses for premium purposes, aligning to the NSW’s Government’s reform agenda for the building and construction industry.
- Clarify that premiums are to be calculated based on the contract price for the work excluding the cost of the insurance.
- Require insurers to submit defined financial and/or non-financial criteria they will use to assess individual contractor risk, rather than SIRA prescribing the criteria, in order to enable eligibility reforms outlined above.
What happens next
Once the new guidelines take effect, icare must develop and submit to SIRA a new eligibility model and a new set of premiums within 12 months. icare can only apply its new arrangements if SIRA is satisfied they comply with the requirements in our Guidelines.
icare is responsible for proposing the date on which it intends to commence any new eligibility arrangements or premiums, and for communicating the details of their new model to insurance distributors and to businesses in the residential building industry.
SIRA will also do a more comprehensive review of our Insurance Guidelines for the scheme in 2022, to respond to other elements of IPART’s review. This will include public consultation.