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The forgotten tax adding billions to the country’s insurance premiums
By Rachel Clun
The “forgotten tax” on insurance premiums paid by households and businesses that earns state governments billions must be put to better use to mitigate future disasters and help make insurance cheaper, says the Insurance Council of Australia.
Chief executive Andrew Hall said coverage for flood damage normally made up the largest proportion of a household’s home insurance premium, if they had that coverage, but the next largest component of their insurance bill was tax.
Development approval in flood zones needs to end, Assistant Treasurer Stephen Jones says.Credit: Nick Moir
“People don’t often realise just how much tax they are paying through their insurance premiums. It’s been a bit of a forgotten tax,” Hall said.
Insurance premiums have soared even as the economy cools, with insurance inflation reaching 16.4 per cent in the year to March, according to the Australian Bureau of Statistics.
More recent Finder research found the median home and contents insurance rose by 19 per cent in the past year to a record $2434.
Assistant Treasurer Stephen Jones said he was worried about the affordability of insurance.
“It’s a critical issue. It’s a cost-of-living issue for households here and now, and therefore, of deep concern,” he said. “We’ve seen over the last two years a significant increase in insurance premiums. In some areas, they’ve gone up by as much as 50 per cent.”
Those higher insurance premiums have helped swell state treasury coffers.
State governments gained more than $6 billion in revenue from stamp duty on insurance premiums alone in the past financial year as insurance costs skyrocketed.
That’s a $371 million boost on the stamp duty revenue they made in the previous financial year, according to state budget analysis from the Insurance Council.
State and territory governments charge about 10 per cent in stamp duty on top of insurance premiums (except for the ACT).
The states also gain tax benefits from insurance premiums in the form of GST, which is calculated after stamp duty and collected by the federal government, but then handed back out to the states.
All up, taxes add more than 20 per cent to the final insurance premium bill everywhere except the ACT.
‘All these things have a big impact on the severity of flood events.’
Stephen Jones, Assistant Treasurer
The figure is even higher in NSW due to its emergency services levy, where the state treasury estimated it pushed up the cost of home premiums by 18 per cent alone, and 34 per cent to the cost of business insurance.
Hall said that while all that tax revenue went back to state governments, it’s the federal government that was the “insurer of last resort”, picking up a lot of the bills for areas that are under- or uninsured or covering a lot of the infrastructure costs when the national disaster funding arrangements surpassed a certain level.
Hall said the system needed a rethink because it was not working.
“There is no incentive in the taxation system for people to be taking more private insurance because they just end up paying more tax,” he said.
“And then the level of government that picks up the bill, ultimately, it’s not getting any of that revenue, or control over it either.”
Hall said the federal government needed to encourage states to spend the stamp duty revenue on resilience and mitigation.
He highlighted a Queensland resilient homes program, which provided homes north of Bundaberg with grants of up to about $20,000 to strengthen roofs against cyclones as an example of the work states could do to mitigate against disaster.
“These are the sorts of programs that we know work – we just need more money invested in them,” he said.
“And when we’re having that debate, the one thing we encourage the Commonwealth not to lose sight of is the fact that the states are collecting an enormous amount of revenue off insurance policies: that would be the logical starting point for how you would fund this.”
Assistant Treasurer Stephen Jones says states need to do more work to get insurance premiums down.Credit: Alex Ellinghausen
Jones said it cost all taxpayers when the federal government picked up a large part of the tab, and states needed to take on more of that burden.
“It’s not fair, and particularly if state governments continue to do dumb things by asking us for assistance when a disaster occurs and at the same time as they’re doing that, [they’re] approving more dodgy developments,” he said.
Jones said states needed to firstly stop approving developments in known flood zones, but then needed to do more to mitigate future disasters through work including changing building codes to make sure homes could withstand significant weather events, and building infrastructure that mitigated potential disasters.
“The surrounding infrastructure is absolutely critical in the risk management, whether that be clearing waterways, or ensuring that fire breaks are appropriately maintained. All these things have a big impact on the severity of flood events,” he said.
Jones said that mitigation work would also affect the cost of reinsurance – the insurance for insurers – which has been a large part of the rise in insurance costs around the country.
He said the federal government was working with the insurance industry on a hazard insurance partnership, which would work out an agreed list of things that households could do to limit risk of fire or flood damage which would reduce their premiums.
“We’re just looking at some practical, pragmatic things we can do because the big structural shifts – the infrastructure piece, the mitigation piece – will take a while to roll out.”
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