Failures further insurance woes

Western Australia’s straining home indemnity insurance scheme is again being thrust into the spotlight after the recent collapse of three builders, with premiums expected to rise and more financial pain likely for the state government.  

Perth-based builders Pitaro Homes and Nominated Homes were placed into liquidation last month, according to documents lodged with the Australian Securities and Investments Commission, with the collapses following that of Geraldton-based Shane Crothers Homes in June.

While the three builders were considered to be small players in the competitive residential building sector, their collapse is nonetheless an indication of the pressures facing the industry.

Building Commissioner Peter Gow said a reduction in housing construction from record highs of more than 30,000 homes per year, to more historically normal levels of around 22,000 homes per year in WA, was pushing some builders to the wall.

“When ongoing work dries up, it puts a lot of builders, subcontractors, and their suppliers under pressure, and we see an increased rate of insolvency tending to happen as a result of that,” Mr Gow told Business News.

However, Mr Gow said he was not aware of any marked increase in complaints received by the Building Commission since activity started slowing, and also noted that builder insolvencies were not above historical levels.

Nevertheless, Master Builders Association WA executive director Michael McLean said the recent collapses were disturbing and disappointing news for a sector in serious decline.

“It’s obviously of concern that the market is yielding these casualties, there is clearly not enough work to go around builders in WA and depending on how they are geared up and how they are managing their affairs, some are not coping with the downturn particularly well,” Mr McLean said.

“This just tarnishes the reputation and viability of builders in that sector, and it’s going to put more pressure on housing indemnity insurance, which is already under a lot of duress.”

Mr McLean said the home indemnity insurance scheme had been a bugbear of industry for an extended period.

Since 1996, any residential building project worth more than $20,000 has required home indemnity insurance, which acts as a last resort to allow consumers to recoup up to $100,000 in the event of a builder’s collapse.

Business News has previously reported that many builders consider the scheme a significant constraint on business, with levels of work effectively controlled by the insurers.

Just two insurers are active in WA, and QBE having a near monopoly with a 90 per cent share of the market, Mr McLean said builders had little choice but to accept large increases in insurance premiums.

In January, the state government, which has reinsured the insurance companies since November 2013, hiked home indemnity insurance preminums by 18 per cent, taking the collective rise in indemnity insurance costs to 40 per cent over the past three years.

That resulted in home buyers being charged between $3,500 and $5,000 for indemnity insurance, depending on the size of the home they were constructing, but Mr McLean said in some cases, especially for small builders, the premiums were even higher.

“I got wind of one builder doing a $2.8 million house that’s been asked to pay about $25,000, and another builder in Geraldton, doing a $40,000 kitchen, was asked to pay $2,000,” Mr McLean said.

“Premium prices are going up and for most home buyers it’s junk insurance, because they’re never going to see any return on that investment.”

However, a Building Commission spokesperson said neither insurer had charged a $25,000 premium, with the highest premium payable in the range of $5,000 to $6,000.

Nevertheless, Mr McLean said it was his understanding that the state government had established a committee to examine indemnity insurance in WA, with the release of an issues paper expected before the end of the year.

“We understand that the government wants to protect home buyers and to give confidence to building a new home by providing protection in the event that the builder goes broke,” he said.

“But there is a cost attached to that, and we think that the cost has become inordinately high and it needs to be reviewed and reduced.”

In addition to the costs for builders and consumers, the home indemnity insurance scheme is becoming a significant financial issue for the state government.

According to the 2016-17 state budget papers, the costs of administering the scheme last financial year was $74 million, an increase of around $45 million from budget estimates.

Mr Gow said the $74 million included prior claims that were not included in previous budgets, because of a lack of reliable estimates for future year payouts.

Income from the scheme also fell well short of expectations, coming in at $27.8 million rather than the $43.1 million forecast.

However, Mr Gow said the reduced figure was due to an accounting issue, not a reduction in revenue.

“The actual revenue in the 2016-17 budget is more correctly profiled under accounting standards for insurance income to be received at the time the risk is incurred, which spreads over the 2015-16 and 2016-17 financial years,” he said.

The scheme is also scheduled to expire in its current form by October 31, but Mr Gow said he expected the arrangements, which include the state government reinsuring QBE and GLA, to be extended, subject to relevant approvals.

Mr Gow said negotiations with insurers were ongoing, but would not comment further at this stage.

Housing Industry Association regional executive director John Gelavis said his association was a staunch supporter of a home indemnity insurance scheme, saying it is essential to protect home buyers.

“HIA supports a market-based, prudentially underwritten and last resort home warranty insurance scheme,” Mr Gelavis said.

“This type of scheme is the best support for consumers when a building contract cannot be completed due to death, insolvency or disappearance.”