10 Sep Risk Factors impacting your Home Warranty premium
Risk Factors impacting your Home Warranty premium
The NSW Government is reforming the Home Building Compensation Fund (HBCF), commonly known as Home Warranty or Builders Warranty, to improve customer protection, improve competition in the market and make the scheme sustainable for the NSW home building sector. A summary of the reform can be found here. Today we will focus on the risk factors impacting premiums.
It is important to note that the final discount or loading will be a weighted outcome of all factors capped at either 30% discount or 30% loading impact. Each builder has been provided a risk based premium discount or loading in a letter from icare in January 2017.
The factors do not differentiate on builder size, with all builders presented with the same criteria against any eligibility review. Small builders that are not required to submit annual reviews are assessed against fewer factors with a similar possible outcome.
Here are some factors applying to reviewed builders and an explanation of why it results in either a discount, loading or both:
The time of an entity licence being held can result in either a discount or loading. The icare HBCF claims experience is that the longer a building licence is held, the less likely claims will arise. Longer building licence periods therefore result in a discounting impact. Shorter licence periods or a newly qualified builder will result in a loading impact. The pricing factor is based on the longest held building company licence in the group secured by Group Trading Agreement (GTA) and the longest held building licence for interstate operations will be applied. The entity licence time held will be adjusted each time a policy is purchased.
The structure of a business can make you eligible for a discount or loading. This is due to claims experience demonstrating that sole traders and partnership business are significantly less likely to generate claims. as a result, sole traders or partnership structures receive a discount impact, while companies and trust structures attract a loading impact.
Adjusted net tangible assets can affect whether you receive a discount or loading. The Tangible Assets retained in an entity could generate either a discount or loading impact for a builder. The claims data shows the higher the levels of retained Adjusted Net Tangible Assets (ANTA) as a percentage of forecast revenue, the lower frequency of insolvency. Builders can choose whether to permit the level of ANTA retained in an entity to exceed the minimum 3% benchmark to attract a discounting impact (i.e. you could reduce dividend payments, retain property assets or limit related loans for non-core activity). Builders who choose to keep ANTA at the minimum 3% threshold will pay a premium loading. To assist in transparency, icare HBCF calculation method and discounting factors will be released. For GTA secured groups, this pricing factor will consider ANTA retained in the grouping against GTA group turnover.
Net profit before tax or taxable income may lead to a discount or loading. Claims experience again states that entities which generate strong net margin for each of the past three trading years have a low likelihood of claims and as such will have a discounting impact. Entities that generate net losses for the past three trading years have a higher likelihood of claims arising, and as a result will have a loading impact. The GTA grouping pricing factor is based on combined Net Margin of the eligible builders of the GTA group.
Adverse past history can direct a business to loading. This applies where eligibility applications and reviews are presented and builder principals are linked to failed entities generated including HBCF insurance; or material unpaid creditors, fatal characteristics exist and eligibility is declined. however, there are some assessments where the case to outright decline is managed through additional constraints and conditions. These cases will attract a loading impact which recognises the increased risk. For GTA groups, adverse history relating to one eligible builder group member will generate a loading impact on all eligible builders in the group.
Having reviews which are not current can incur a loading. Reviews are scheduled for higher risk businesses earlier in the annual review program. A scheduled review that is 30 days overdue and does not permit an assessment to begin will attract a loading. Overdue reviews include cases where no submission has been made within 30 days of a scheduled review date and/or a submission has been made on time but is materially incomplete, so an assessment can not commence. For GTA groups, the overdue review pricing factor will be applied should any GTA group member’s required information be overdue (including builder or non-builder parties to the current group trading agreement).
BCRP participation can result in a discount. The program is sometimes a condition of eligibility because of a lack of demonstrated experience in a particular project. Builders on this BCRP program are less likely to generate claims based on icare HBCF data. For GTA grouping, any group member on the BCRP will activate BCRP discount for all eligible builders.
Audited accounts can attract a discount. The existence of additional controls and financial testing of reports increases the comfort in the financial statements reviewed and shows business maturity. The discount applies because a builder has submitted prior year end external audited accounts (covering accounting standards compliance and ongoing concern disclosure); and most recent year end account submissions have been audited or will be subject to an audit. For GTA grouping, the discount impact applies if the two audit test is met for the financials of all GTA group members.
For more information, please feel free to contact your CRM Broker on 1300 880 494.