Fire and Emergency New Zealand recently proposed a significant increase in the levy on insurance policies to address a funding shortfall resulting from salary increases agreed upon in a collective wages agreement with firefighters. This blog explores the potential impact of this proposed levy increase on insurance policyholders and the concerns raised within the insurance industry.
Proposed Levy Increase and Funding Shortfall: To cover the funding shortfall caused by salary increases, Fire and Emergency New Zealand has suggested a 12.8% increase in the levy on insurance policies. According to a consultation paper, the organization deems expenditure reductions as unrealistic for meeting the costs of the settlement and addressing the funding shortfall while maintaining cash reserves. The paper states that capital expenditure reductions would require substantial cuts, which may not be feasible.
Insurance Council of New Zealand's Response: CEO Tim Grafton of the Insurance Council of New Zealand (ICNZ) expressed his concerns on LinkedIn regarding the timing of the levy consultation, which was released just before Easter, allowing only 14 business days for submissions during a holiday period. Grafton questions whether Fire and Emergency New Zealand has thoroughly explored potential efficiency gains and pledges to seek answers to such inquiries.
Government Loan and Repayment: Acknowledging the funding issue, the government will provide a loan of $NZ75.4 million ($70 million) to Fire and Emergency New Zealand, which will be repaid over a ten-year period. Although the loan offers short-term funding, Fire and Emergency emphasizes the need for additional funds to repay the government and cover projected deficits. Deferring levy increases would require another loan and create future financial challenges.
Proposed Approach and Impact on Policyholders: Fire and Emergency suggests increasing the transitional levy now to mitigate the impacts over the years and maintain minimum cash reserves. However, this means policyholders would face increased levies for two financial years starting from July 1, 2024. Levies on property and motor vehicle insurance contribute significantly to Fire and Emergency's revenue, while a Crown contribution of $NZ10 million ($9.3 million) supports public goods and services.
Implications of Wages Settlement: Fire and Emergency reached a wages settlement with the New Zealand Professional Firefighters Union in December, which will result in increased costs across various aspects such as fleet, equipment, and frontline staffing levels. The consultation paper states that these additional costs cannot be accommodated within existing funding levels, leading to projected deficits over the next five years.
The proposed levy increase by Fire and Emergency New Zealand has sparked concerns within the insurance industry. While the organization seeks to address a funding shortfall resulting from a wages settlement, the impact on insurance policyholders is a subject of debate. As the consultation process unfolds, it remains to be seen how the proposed levy increase will be received and whether alternative solutions can be explored to ensure the financial stability of Fire and Emergency New Zealand without imposing undue burdens on policyholders.
Resource: FENZ proposes 13% levy hike (covernote.co.nz)
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