The NSW Government will remove the NSW Emergency Services Levy (ESL) from insurance premiums on any policy renewed or commencing on or after 1 July 2017.
There is still some confusion in the market about the phase out. Recently, an insurance company had to provide refunds to customers after it removed the ESL from its policies but did not reduce its total premiums to customers.
In addition, the Emergency Services Levy Insurance Monitor has already raised concerns regarding information being given to clients by some insurance brokers.
Below are some common broker questions in relation to the ESL.
If my client has already paid their insurance policy, won’t they be paying twice when the emergency services property levy (ESPL) commences?
This is not accurate.
Apparently some clients have been told that where the period of the insurance policy extends beyond 1 July 2017, the client will be paying twice for their emergency services – once via the insurance levy, and later via the property levy. This is not correct, and information of this nature should not be provided to clients.
The ESL paid on policies incepted at any time during 2016-17 is intended to fund the insurance company’s contributions to the emergency services for the financial year (2016-17). All insurance premiums received and reported in the final return for the year ending 30 June 2017 are taken into account for contribution calculation purposes. The period of the policy cover itself is not relevant in determining the contribution ESL liability of an insurer.
The ESL on such a policy relates only to the 2016-17 financial year, whereas the new property levy will relate to the 2017-2018 financial year.
Insurers are able to recover their contributions over the 2015-16 and 2016-17 years combined through the ESL charged in premiums. However any tapering of ESL rates throughout 2016- 2017 should be moderated so that rates charged to policyholders are fair. Insurance companies have indicated they are likely to taper their ESL rates over the course of 2016-17 so that rates will be relatively low in the months close to the 1 July 2017 termination date.
The Price Exploitation Guidelines issued by the Monitor are designed to ensure that insurers fairly charge customers for ESL for policies issued pre-1 July 2017. If not, they are subject to significant penalties. See in particular Guidelines 4 -7.
How do I minimise the risk of engaging in false or misleading conduct?
Do not engage in conduct that:
- falsely represents (whether expressly or impliedly); or
- misleads or deceives, or is likely to mislead or deceive, anyone about the effect, or likely effect, of the ESL reform.
How do I minimise the price exploitation risk?
There are a number of things insurance brokers can do to minimise the risk, such as:
- not providing information that is inaccurate
- passing on the required ESL Insurance Monitor information to the client
- not knowingly or recklessly allowing an insurance company or its agent to charge ESL for contracts entered into or renewed from 1 July 2017, or to overcharge for an earlier period.
The Monitor expects communications relating to the removal of the ESL component from insurance premiums and the reasons for any movement in premiums after 30 June 2017 to be clearly and accurately explained.
NIBA strongly recommends that if clients have questions or concerns regarding the changes to the ESL, they should be referred to the ESL Monitor’s website, where it explains the changes.
What will happen if I’m found to be providing false and misleading information?
The Monitor has extensive powers where it believes clients have been provided with false and misleading information. Penalties of up to $10 million for body corporates and $500,000 for individuals can apply where this occurs.
What are the Section 30 Notice requirements?
Where the requirements apply to you, you must provide the Section 30 Notice in the form prescribed by the Monitor in or with any invoice or statement containing the actual dollar price payable for a regulated contract of insurance unless the invoice or statement includes the information contained in the notice (for example, schedules, certificates of insurance, Product Disclosure Statements with the price in them, which should be rare).
What do I do if I arrange business with an unauthorised foreign insurer?
Typically, where an insurance broker arranges business with unauthorised foreign insurers (UFIs), they will lodge the relevant return as the “insurance company” for the purposes of the legislation.
There are no adjustment provisions so the only opportunity for ESL adjustments is at the lodging of the final 30 September 2017 return. This could result in a shortfall. In past years, cancellations that occurred after 30 September would simply be picked up in the next fiscal year data.
This is principally an issue for insurance brokers arranging insurance with UFIs.
The number of cancellations after September may be relative small. Given policyholders gaming the system to obtain refunds of unearned ESL could be expected to cancel policies before 1 July it is probably reasonable to assume that cancellations after 30 September 2017 will follow patterns of previous years and thus previous years’ experience should provide a useful guide.
What is meant by Retail and Wholesale as they appear in Guideline 12 of the Price Exploitation Guidelines?
Guideline 12 provides that an insurance company that has collected ESL revenue on retail policies sold in 2016-17 will be expected to refund a pro-rata portion of that revenue to a policyholder who cancels the regulated contract of insurance before 1 July 2017.
For wholesale policies, appropriate arrangements can be negotiated between the parties in each case.
The Monitor has advised NIBA that the terms are intended to be consistent with how they are defined in the General Insurance Code of Practice.
What should I be doing to comply?
Appoint a senior manager to oversee the phasing out of the levy in your office.
The key tasks are to:
- identify what role you play – do you act for the insurer or the insured? Different obligations apply depending on whether you are or not.
- irrespective of your role, ensure the customer gets a Section 30 Notice with the relevant invoices and statements. This will usually be done by either passing on the insurer or its agent’s notice to the insured or using your own.
- make sure you only provide accurate information to insureds on the ESL transition that is consistent with any information provided by the Monitor and comply with the Monitor’s Guidelines in this regard.
- if you are an insurer or agent of one (or a broker acting for an insured in arranging insurance with a UFI), ensure that there is no price exploitation and consider the Monitor’s Guidelines on Price Exploitation carefully.
- if you are a broker and believe the insurer is engaging in price exploitation make sure you address the issue with the insurer so any concerns are addressed.
- keep track of any information released by the Monitor and NIBA to consider how it may be relevant to you.
Refer to the ESL Insurance Monitor’s website if you would like further information or seek legal advice if you are unsure what your obligations are and how to meet them.
Meanwhile, NIBA continues to liaise with the ESL Monitor’s office during the phasing out of the ESL insurance levy.