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Soft compulsion favoured for homeowners to get building work cover

Wednesday 24th April 2019

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People building new houses will need to get insurance or a guarantee to protect themselves from faulty work if proposals contained in the government's proposed raft of building law reforms go ahead.

The proposal could push up the immediate cost of building by 1 percent but may be worth it for the extra protection provided and the lower overall cost expected should something go wrong, the Ministry of Business, Innovation and Employment says in a discussion document. A compulsory regime was rejected, with MBIE officials saying it would be a significant intervention relative to the problem created by apportioning costs in the event of construction faults, such as the 'leaky building' syndrome.

The guarantee plan was among a raft of proposals Building and Construction Minister Jenny Salesa unveiled earlier this month as part of a major reform of building law spanning building products, risk and liability, penalties, the building levy and occupational regulation.

It would require homeowners to take out a guarantee or insurance product for new builds or significant renovations. An opt-out option would be available if owners want to manage their own risk. 

MBIE favours homeowners holding the policy because so many building firms go bust. Just 22 percent of those set up in 2008 were still operating more than a decade later, according to new research published with the discussion paper. About 53 percent of new builds and 23 percent of renovations are currently covered by insurance or guarantees.

Guarantees typically provide assurance that if something goes wrong it will be fixed, whereas insurance products offer compensation for loss and provide greater protection to a homeowner. 

Covec, a consultancy that undertook some of the research for MBIE, estimates the building problems cost about $85 million a year, of which guarantees and insurance cover about $40 million. Making them compulsory would shift some of that cost from a small number of homeowners and spread it across the entire market, it said. 

The Master Build guarantee on work done by Registered Master Builders Association members is the dominant product, accounting for 10,000 of the 16,500 new properties covered, and 2,000 of 6,500 renovations. The Covec report said the Master Builders Association planned to move to an insurance-backed scheme. 

One of the issues MBIE wanted canvassed was an analysis of existing products in New Zealand following the collapse of insurer CBL Corp, which previously underwrote the BuiltIn Homefirst Guarantee, a 10-year warranty. Since CBL's failure, BuiltIn re-sells Stamford Insurance on slightly different terms and pricing.

Covec said the size of the building work guarantee and insurance product market was small relative to other insurance markets. While Stamford has expressed a willingness to cover the entire market with an insurance-backed scheme, that wasn't a certainty. It could also leave Stamford as the sole supplier, raising the risk of market power and higher prices as result, Covec said. 

The consultancy suggested MBIE seriously consider direct government involvement as a potential provider, "especially if further discussions with the industry suggest full coverage is unlikely or if extension to cover the whole market would be unlikely to be done efficiently - through differential risk-based pricing."

MBIE said introducing a government scheme would be too expensive and didn't match the size of risk being managed. 

"While homeowners would be covered, it would crowd out the private market for guarantee and insurance products," MBIE said. 

The ministry said providers have been reluctant to enter the local guarantee and insurance product market for a number of reasons, including patchy performance internationally and their  'long tail' of liability, where a one-off premium is paid up-front for decade-long cover. 

"This can be a significant liability for providers and they can find it hard to take steps to manage those risks - such as raising premiums or declining cover," MBIE said.

With the products estimated to cost about 1 percent of a total build, that only amounts to a potential premium pool of $200 million, MBIE said.

Reserve Bank figures show annualised gross earned premiums across the country's largest insurers was $9.98 billion at the end of the December quarter. 


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