The NSW government’s mandatory home warranty insurance cover has become so expensive it's forcing downsizers and small developers to abandon projects. Media reports and feedback from brokers show that icare’s Home Building Compensation Fund (HBCF) is much more expensive than equivalent schemes in other states and is stalling much-needed housing supply. Some brokers say the high premium prices raise serious questions about the scheme’s sustainability.
A report in The Australian Financial Review (AFR) found that an NSW Mid North Coast couple in their late 60s, the Buxtons, were hit with a $265,000 building insurance bill for a $2.9 million build. The cost forced them to abandon a project to replace their old house with two apartments. “We are just all gobsmacked. No one’s heard of this before … this whole system is completely broken,” David Buxton told the AFR.
When government-mandated insurance reaches a point where it materially impacts whether construction can proceed, it signals a market failure. The original intent of government-run schemes, like the HBCF, was to provide affordable cover, free from the profit margins of private insurers. Now, with affordability out of reach for many, serious questions are being raised about the sustainability of the current model and its broader impact on the construction sector.
Some industry observers point out that a lack of transparency around icare’s pricing makes it difficult to pinpoint the exact drivers behind these exorbitant premiums. If the cost is primarily due to a spike in claims, it suggests deeper issues within the system.
“What isn’t clear is how icare is managing its risk pool, setting reserves, and controlling costs,” said Tyrone Shandiman (pictured), chair the Australian Consumers Insurance Lobby (ACIL).
Shandiman said when pricing reaches a level that makes construction unviable, it highlights a “fundamental issue” in claims experience and/or scheme management.
The disparity with other states is stark. In Victoria, a similar insurance policy for the same build would cost about $13,000, while in Queensland it would be around $25,000. The Buxtons’ experience is not unique. Reports show that construction projects are being reconsidered or abandoned due to the cost of insurance.
With the HBCF at crisis levels, some are calling for private insurers to be brought into the mix. While private sector involvement could introduce competition and potentially drive down costs, there are caveats.
“When a government-run insurance fund reaches crisis levels, every option should be on the table - including involving private insurers,” said Shandiman.
However, private insurers are not a panacea.
“We must also be realistic: private insurers are for-profit entities,” said Shandiman. “They will price risk based on claims experience and selectively underwrite what is profitable.”
If the fund’s current pricing simply reflects high claims costs without a profit margin, there is no guarantee that private insurers can offer a cheaper solution.
Any chance of finding an affordable solution, experts say, lies in addressing a likely root cause of cost issues: claims management.
“Reducing and better managing claims should be the government’s first priority if the goal is to reduce premiums and make insurance affordable again,” said the ACIL chair.
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