Terms of reference - Review of insurer eligibility practices in the home building compensation scheme

1. Purpose

1.1  

This document sets out the Terms of Reference for the forensic accounting review of the icare Home Building Compensation Fund’s (HBCF) practices in determining eligibility of builders to obtain insurance under the Home Building Compensation (HBC) Scheme (the review). The review will be undertaken by McGrathNicol (the forensic accountants) on behalf of the State Insurance Regulatory Authority (SIRA).

1.2  

The review will evaluate the eligibility assessment and determination made in relation to selected builders for the financial years 2018 to 2023 (the relevant period).

1.3  

The review will examine the particulars of any deed of indemnity (DoI) entered into between icare HBCF (icare) and the selected builders, including assessing the value of assets referred to in any DoI in satisfying the eligibility requirements.

1.4  

In response to recommendations of the Independent Pricing and Regulatory Tribunal, the NSW Government has agreed SIRA will re-write its insurance guidelines to improve SIRA’s regulatory oversight of licensed insurers in the HBC scheme. The review will inform potential changes to SIRA’s regulation of licensed insurer’s eligibility practices under the updated guidelines.

• 103EC (c): contracts of insurance, including eligibility requirements for obtaining insurance and underwriting of contracts of insurance
• 103EC (d): review of compliance with any such eligibility requirements
• 104E (1) (e): alternative indemnity products, including eligibility requirements for obtaining cover and underwriting of products, and
• 104E (1) (f): review of compliance with any such eligibility requirements.

Under section 103ED (4) of the Act, insurance guidelines may adopt the provisions of other publications, whether with or without modification or addition and whether in force at a particular time or from time to time.

Under section 103ED (7) of the Act, it is a condition of licence issued under Part 6C that licence holders comply with the relevant provisions of the Guidelines.

2.6

The Guidelines require licensed insurers to submit their eligibility model to SIRA for consideration. icare’s model specifies criteria for acceptance of a DoI as part of establishing eligibility for some builders. Once an eligibility model has been approved by SIRA, icare must apply it without discretion.

2.7

In the NSW scheme, as at 30 June 2021:

• there were 20,133 builders eligible to buy insurance from icare
• icare held indemnities in relation to 4,463 eligible builders
• the average value of each indemnity was $216,215.

3. Builder Eligibility Model

3.1

Builders must obtain a Certificate of Eligibility before they can apply for a Certificate of Insurance for specific projects. Eligibility approvals provide builders with an eligibility profile outlining:

• the value and number of individual projects permitted under construction at any time, and
• the maximum contract limits for all individual construction types approved.

3.2

The primary purpose behind requiring builders to establish HBC eligibility is to minimise the risk of loss to homeowners, licence holders and the scheme. A builder must be assessed against defined criteria to obtain HBC eligibility.

3.3

The Guidelines outline requirements for licence holders’ eligibility assessment criteria and specify that a licence holder may require a builder to meet additional conditions as part of eligibility. These relevantly include that the licence holder may require, as a condition of eligibility, that a builder obtain certain guarantees or indemnities.

4. Review to be conducted by Forensic Accountants

4.1

The forensic accountants will undertake the following:

• 4.1.1 - Review the eligibility assessments conducted by icare in relation to the HBC Scheme for the selected builders during the relevant period.
• 4.1.2 - Determine whether the eligibility assessments over the relevant period were conducted accurately and in accordance with the relevant SIRA and icare manuals and guidelines (in effect during the relevant period).
• 4.1.3 - Identify and review the particulars of any DoI between icare and the selected builders to satisfy the eligibility requirements.
• 4.1.4 - Review the procedures undertaken by icare to determine the nature and value of the assets used to support any DoI and consider the adequacy, appropriateness and suitability of those assets to satisfy the eligibility requirements.
• 4.1.5 - Identify whether any selected builders were afforded preferential treatment in their eligibility assessments during the relevant period.
• 4.1.6 - Consider whether there was any non-compliance with legislation or the Guidelines with respect to the administration of the eligibility model by icare in conducting the eligibility assessments.
• 4.1.7 - Where appropriate, apply data analytics to identify any other issues with respect to scheme integrity or non-compliance.
• 4.1.8 - Determine whether icare adhered to broader risk management policies and procedures in conducting and approving the eligibility assessments of the selected builders (including delegated authority limits, conflicts of interest etc.).
• 4.1.9 - Identify all relevant persons involved in the eligibility assessments and approvals of the selected builders (including icare staff, brokers and other third parties).

5. Assessment Principles

5.1

In conducting the review, the forensic accountants will assess icare’s eligibility practices according to the principles set out in the Guidelines and icare’s Eligibility and Underwriting Procedures Manuals as were in effect throughout the relevant period.

6. Accountability

6.1

SIRA will obtain from icare and/or the selected builder any records required to complete the review.

6.2

SIRA is responsible for providing the forensic accountants with the relevant information obtained from icare and/or the selected builder to undertake the review in a timely manner.

6.3

The forensic accountants will provide SIRA with updates on the progress of the review, as required.

6.4

On completion of the review, the forensic accountants will provide a report to SIRA in a timely manner or in accordance with a timeframe as may be agreed between SIRA and the forensic accountants.

6.5

The forensic accountants are not to disclose or discuss the findings, outcome, observations, or other content of the report with icare or any other party at any time, unless authorised and/or directed to do so by SIRA.

6.6

The forensic accountants will provide SIRA with a proposed review scope that will set out the methodology to be employed in selecting builders for the review.

7. Amendments

7.1

These Terms of Reference may be subject to amendment during the review, but only to the extent the amendment seeks to address a preliminary finding that requires further investigation.