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Money for nothing
October 26th, 2009
THE well known Dire Straits song ‘Money For Nothing’ could have been written about Australia’s compulsory housing warranty insurance regime.
For insurance companies and their brokers the premiums roll in and very little of it is ever goes to the people it is supposed to protect.
Like the song says, “that ain’t working but that’s the way you do it, lemme tell ya those guys aint dumb”.
Earlier this year, the Federal Ombudsman’s report stated that it’s the worst performing insurance in Australia. The recently released review by the Victorian Essential Services Commission confirms the warranty scheme is nothing short of a scam.
This scheme has been maintained for seven years on a platform presented by Vero and its partner HIA and supported by a number of state governments.
The Standing Committee on Finance & Public Administration of the Victorian Upper House has recently announced yet another inquiry (No 38) and the terms of reference includes “the specific role of government agencies in their effectiveness in managing and representing Victoria’s registered builders”.
How timely!
The latest Victorian report reveals insurers have only accepted 273 claims from 1363 received between 2002-08. Over the six years a total outlay of only $10.23 million. It’s a profitable business, with insurers earning around $7 million in premium each and every quarter.
The report shows the product is failing to meet consumer expectations and that’s now having a negative effect on the industry via a stream of critical reports in the daily media.
While Governments are duty-bound to their constituents, the politicians administering this scheme have reacted by doing little more than endorse the status quo in the past. However, the content of these reports leave them exposed as their duty of care is now compromised.
The HIA shares half ownership with AON brokers of the brokerage HIA Insurance Services, along with the company's revenue of $22 million last year plus another $15 odd million paid in licence fees for the use of the HIA name, and told a Senate inquiry the product is "certainly not worthless" and it acted as a safety net. But that was before these damming reports.
Meanwhile, the national building industry is facing a crisis with three insurers withdrawing from the market before years end. This will see some 25 to 30% of builders face an uncertain future because without an insurers letter of eligibility they cannot work.
While the departing insurers will claim their exit is driven by a non profitable product, it is the industry belief the latest reviews now question the role and motives of all players who continue to participate in this scheme as their past presentations are now shown to be questionable.
This is compounded through the issue of builders providing non-transferable securities and indemnities to insurers that makes them the underwriters of the insurance that has been largely denied in the past. But the latest review shows that 44% of all builders over the life of the current scheme have provided these undated and unending securities as well as all those builders prior to 2002.
The dominant insurer is Vero and prior to 2002 they held 93% of all builders in their book and accordingly most builders are tied to them as securities are not transferable. Thus, competition is stifled through securities and deeds held.
Moves are currently afoot within the building industry to challenge insurers over the issue as builders believe the practice is not only illegal but also unenforceable. It is being backed by some of the country’s larger home builders who wish to remain anonymous for fear of retaliatory action that could see the loss of their businesses through the power insurers hold over them.
It is difficult to believe that a fundamentally flawed scheme could survive in any western society let alone a democracy like Australia. Compulsory warranty insurance is greed driven and unsustainable. It is bleeding the life out of the people it’s supposed to protect. When it eventually implodes, those responsible will have to account for their roles.
Phil Dwyer’s backers launched a Supreme Court action against the legality of the securities late last week.
Nelson Yap, Editor