Monday, July 25, 2005

Why Buy Fire Insurance When You Can Give Bracks Money?

After Chris's insightful look into the fire services levy, we find that while businesses are punished under Bracks for buying property insurance, it seems there is a link between donations to the Victorian ALP and favourable action on planning issues

Monday, July 18, 2005

Welcome To Visitors From "The Other Cheek"

Welcome to the first time visitors coming here from The Other Cheek.

Thursday, July 14, 2005

Bracks Hidden Tax: The Fire Services Levy

It is an honour to bring you a guest post from Chris Berg, who highlights how the Bracks government is intent not just on continuing a tax that punishes people for the wisdom of getting insurance, but also on introducing Enronesque accounting tricks to inflate State Government revenues without appearing to raise taxes.

In Victoria, and in some other Australian states, the Fire Department is paid for with a tax on insurance companies - the Fire Services Levy. This 'levy' - its just a tax, although senior Labor politicians disagree - is calculated as percentage of the premium on all property insurance policies, residential and commercial alike.

Problems with the existing Fire Services Levy

Sounds like a reasonable idea? There are a host of flaws with the system. Firstly, it encourages free-riders. Those who don't have insurance but still have a flammable house are being subsidised by those who pay the levy with their policy.

Secondly, it adds to the already extremely high cost of insurance, and does so in a blatantly money-grubbing way. I'll take you through it. Lets say you have a premium valued at $100 on your policy (i.e. the insurance company sees $100). On top of that you have to pay your Fire Services Levy, which, in the country at least, would be another $50. You know pay $150 for $100 worth of insurance.

But it doesn't stop there. You have to pay GST on top of that - GST which is calculated on the $150, not your initial premium. Thats a tax upon a tax, bringing up the cost to $165. And then you pay stamp duty - another 10 percent on of the after FSL and GST cost - you now pay $181.50 for $100 worth of insurance. A tax upon a tax upon a tax.

As it stands, these compounded taxes make Victoria one of the highest taxed places for insurance in the world. That is not an exaggeration.

The proposed changes

Naturally, this gives a huge incentive to minimising premiums and maximising the deductable (excess). This is what large companies have been doing to minimise the extremely high insurance taxes.

This isn't necessarily a bad thing. High deductibles and low premiums create an incentive for companies to do much more risk management in house. The more expensive a claim will be, the more likely the company will go out of its way to avoid it. And to do so, they institute stricter work safety practise, practise fire management techniques, and other important things that the insurance company would be trying to make them do if they had a high premium. In some cases, companies have gone so far as to run and maintain their own fire department in house. Their insurance policy acts therefore more like re-insurance, rather then the first port of call after a loss.

So what's happened? The Bracks Government, in its unending wisdom has decided that high deductibles are a Bad Thing, draining much desired money out of government pockets. In an effort to combat this 'avoidance' (its not a 'tax avoidence' remember - because its not a 'tax'!) they want the FSL to be levied upon a 'deemed premium' - an essentially invented sum. Insurance companies are supposed to imagine how much companies would be paying in premium if they didn't have such a high deductible, and charge the levy based on this invented 'deemed premium'! It's hard to over-emphasise this fact: it is an invented, imaginary, fictitious premium.

This is supposed to target only those with a deductible of over $10,000 - in other words, it is specifically directed a large corporates. Most corporates with policies that large are the very companies which are abandoning Victoria in droves - heavy industrial manufacturing.

Nevermind the absurd regulatory burdens this places on the insurance companies (the costs of which they will of course pass on to their clients). Insurance companies in Victoria will now be expected to keep two sets of books - one for the real policy, and one for the imaginary policy with the 'deemed premium', in order to pay the FSL.

Calculating insurance is an extraordinarily complex business, and negotiated on an individual basis. Policies can be peril-specific, and time specific, in fact, anything that can possibily be negotiated between the insurers and corporations is up for grabs. How is a 'deemed premium' supposed to be calculated off such specific and unique policies?

The Insurance Council of Australia is up in arms. The large corporations which this will effect are up in arms. This piece of legislation, which is due to be tabled on July 19 was developed without consultation with any industry body whatsoever - as far as we can tell it was entirely concocted by the fire services and the state government. The legislation shows no familiarity with the mechanics of insurance policies.

Penalising high deductibles reduces the incentive to conduct risk management in house. I could go on, but suffise to say that there are dozens upon dozens of practical issues which have not been considered by the Bracks Government.

And the worst part is that nobody knows about it.

Is there a solution?

Lets face it - with no strong opposition and no media attention, the legislation is going to pass. But it is worth thinking about what is a preferred solution. After all, I'm not so much of an anarcho-capitalist that I don't believe in the fire department.

First of all, the Fire Services Levy is the wrong way to pay for the fire department. Fire management is specific to property, so any charge for the fire department should be taxed upon that, for instance, bundled with rates. This is the way it is done in some other states, including WA. This would eliminate free-rider problems, and ensure that the fire department is adequately funded. (But, we should be realistic - would you want to be Bracks and increase what is essentially a land-tax?)

If the FSL remains as it is, the stamp duty on insurance should be eliminated, and the GST and FSL should not be calculated on top of each other. It is absurd to pay a tax on a tax.

But you have to wonder - is the FSL scheme a punitive tax? The occasional left-wing economists who come out arguing for higher gasoline taxes are wanting to wean people off gasoline - is the extremely high insurance taxes in Victoria trying to wean companies off insurance?

It is more likely that the Victorian record high insurance taxes will merely wean companies off Victoria.