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Thursday, 29 October 2009
Page: 7580


Senator MILNE (10:15 AM) —I move:

   That the following matters be referred to the Economics References Committee for inquiry and report by 31 March 2010:

(a)   a reconsideration of the committee’s findings in relation to Australia’s Mandatory Last Resort Home Warranty Insurance Scheme, in light of:

(i)   the 2008 Federal Ombudsman’s report that demonstrated that last resort home warranty insurance is the worst performing insurance in the nation,

(ii)   the Essential Services Commission’s review of the Victorian Domestic Insurance Scheme which demonstrates that there is virtually no benefit to anyone other than the insurers and their brokers of this insurance product,

(iii)   evidence to these inquiries which demonstrate that the Senate’s conclusions were based on information now shown to be wrong, including the fact that the Senate estimated that less than 10 per cent of builders provided securities whereas 44 per cent of those in Victoria have done so since 2002,

(iv)   the lack of competition in the market which is now down to three insurers, and

(v)   the questionable legality of the deeds of indemnity, bank guarantees and securities demanded by insurers as a condition of eligibility for warranty insurance;

(b)   any reforms which may lead to appropriate consumer and builder protection and improved housing affordability; and

(c)   any related matters.

I am at a loss to understand why the government and opposition, as has been indicated to me by both of them, will not support this motion of reference back to the Senate Economics References Committee for a one-day hearing to reconvene the inquiry we held in order to review the evidence and the conclusions the committee made previously. I find it extraordinary because of what I am now going to put on the record. Something is about to happen, and when it happens I do not want to hear from the government or any member of the coalition that they did not know it was going to happen. I do not want to see them wring their hands. We are aware that by the end of November, CGU insurers and, by the end of December, Lumley Insurance will have withdrawn from the market for builders warranty insurance. That means that by the end of December, 25 to 30 per cent of Australia’s builders are going to be in dire straits.

Those builders are going to be in dire straits because the law says there has to be mandatory last resort home warranty insurance. The law says it has to be in place or they cannot build. But they will not be able to adhere to the law because they have no more securities to offer. They have already provided securities to Vero and QBE insurers, who were the only two major players left in the market. The builders already have securities with them. They have no more to offer, so they will not be able to build. They will either go broke or have to build illegally. Twenty-five to 30 per cent of Australia’s builders are going to be in this position by the end of the year and both the government and the coalition know it but will not act on it.

What is going on here? There have been 38 inquiries into last resort home warranty insurance since 2002 and every one of them hears the same evidence. Parliamentary inquiries, one after the other, have been told that this insurance product is worthless. Tasmania has finally abolished it and that is a good thing. Every one of these inquiries hears that the best way of managing this is the Queensland system. Everybody knows that, and yet every time these committees report they are immediately swayed by the Housing Industry Association and by Vero Insurance and suddenly they go to water. It is time we heard why governments go to water so profoundly in the face of lobbying from these insurance companies.

So I want this inquiry reconvened because at the end of the year builders are going to be in dire straits and either will be forced into noncompliance with the law or will go broke. The other reason why it is critical we deal with it is that I believe the evidence given to the committee was either misleading or misleading by omission. We had a lot of allegations about just how profitable this insurance is to the insurers and what a worthless product it is to the consumers. We heard that over and over again. But along came the insurance companies saying, ‘No, no, that is not the case.’ Since the Senate economics committee reported on this, we have had the Victorian Essential Services Commission report. That report used New South Wales builders warranty insurance templates and, on page 36 of the report, it is stated that the total number of claims paid between 2002 and 2008 was only 273. In that six-year period the total payout to consumers was only $9 million or thereabouts. But the total payout from premiums received each quarter from December 2005 to June 2008 was $10½ million. In other words, the insurance companies have taken more in three months than the total paid out over the full six years.

That is a good business to be in, isn’t it. You earn more in three months than you pay out in six years. But it was not just the Essential Services Commission report that has come out since the Senate report. We have also had the insurance ombudsman’s report, and it makes very clear that evidence being given by organisations like the Builders Collective of Australia was true and that evidence being given by the insurance companies was not. In the ombudsman’s report, in terms of commercial lines of insurance, it states that the highest rate of rejected claims, running at 45 per cent, was found in relation to builders warranty. If you have a look at the others, you find that it is a very small number. So look at the profitability and look at the number of claims that have been rejected and ask yourself: why is this product mandatory?

I simply do not understand it because, as we know, it has not been used. It has not been used when there have been collapses such as the Beechwood collapse in New South Wales and the Gumleaf Construction collapse in Victoria. If it is effective in providing redress when you have major collapses, why was it bypassed in those cases? The government has argued previously that it has to be mandatory. My argument is that if it was worth anything then people would go and source this insurance product. In the end, even the HIA was embarrassed into saying that they thought it would be all right if this product were made voluntary. But no, the government insists that it remains a mandatory product.

I think we have to look at who is benefiting. The overwhelming beneficiaries are Vero Insurance and QBE, with Vero being the dominant player in the market. There have been 38 inquiries which, time after time, keep coming up with recommendations that benefit this particular insurance company. I ask the government to explain when they stand up to respond to this what the level is of Australian Labor Party investment in Suncorp-Metway, which owns Vero Insurance. I think the community has a right to know the answer to that question. Builders around Australia are asking that question. Consumer groups—Choice magazine—quite rightly called this junk insurance. At least the Tasmanian government found it to be worthless and abolished it. We should be moving to a much better regime of consumer protection than this offers, but it is rolled every time. I simply do not understand why, when clear evidence is presented, governments cannot reach the obvious conclusions. In the last Senate inquiry, there was sufficient evidence to suggest that the recommendations ought to have been that we should have a national approach to this issue of protecting consumers in the face of shoddy building or builders becoming insolvent, dying, disappearing and so on, that we should move to a system based on the Queensland model of home warranty insurance and that the federal government should oversee the design of the scheme and have it implemented through the COAG process. We should have adopted a time frame for that to happen so that the new scheme would come into operation as soon as possible. That has not happened. We do not have a national approach. And guess what has happened: we now have yet more inquiries announced with, as I see in media reports, a new inquiry being announced in Victoria. That was announced on 17 September this year as a result of the Victorian Essential Services Commission report.

The first thing that should happen is that the federal government should immediately move to abolish this, come up with a uniform scheme and have it delivered through COAG. Secondly, we should be making sure that the product which exists at the moment is not mandatory. If it is any good, it will be supported voluntarily. Thirdly, we should make sure that any form of home warranty insurance is included in the National Claims and Policies Database so that there is transparency about the performance of the insurance product. Fourthly, we should make sure that, if any loopholes remain in Commonwealth regulation or legislation, such that home warranty insurance is exempted in any way from oversight by APRA, the ACCC or ASIC, that legislation or regulation should be amended immediately to close the loophole.

The last time the Senate Economics References Committee inquired into this issue, it heard evidence from insurers which seemed to contradict other evidence that they were making great profits and that they had a poor-performing insurance product. Now, however, with the insurance industry ombudsman’s report making it perfectly clear it is the worst-performing product in the nation—45 per cent of claims rejected—and with the Victorian Essential Services Commission report showing that, each quarter, these insurers are making more than they have paid out in the whole period, you really have to ask, ‘Is the Senate going to stand for people coming before it who know all this and who, when they are asked, keep quiet about it in order that their product at the expense of builders continues to be supported by being kept mandatory?’

Going back to the issue of builders, we have a situation now with securities and indemnities. This was brought up in the last inquiry. The way that the insurance companies were requiring builders to provide unlimited bank guarantees and various kinds of deeds of indemnity that lock in builders and preclude them from being able to change insurers was made very clear. You have to ask, ‘How is it possible that you can offer an insurance product and then require the person seeking insurance to put up some surety against it?’ That is virtually asking the person seeking the insurance to become the reinsurer. I cannot believe that is legal. It has got to the point now where builders are so desperate and worried about what is going to happen to them by the end of the year that they have gone to court to try to establish whether it has been legal for these insurance companies to require them to put up securities and deeds of indemnity such that they are now stuck in a situation where they cannot meet the law and are likely to go broke because they have been forced to reinsure.

These insurance companies are taking virtually no risk here. They get the premium. They have the reinsurance capacity so that, if anything goes wrong, they can get it back from the builders concerned. How fair is that? When you take out any other form of insurance, the insurance company does not come back and require you to put your house up as surety against that insurance. The premium reflects the level of risk. That is what you do for life insurance, house insurance, car insurance or anything else. If you are an at-risk applicant for insurance, you will pay a premium.

As we said when we talked in this place about sea level rise around the coast, the issue is—as I have warned for years—that there will come a point, and there already is a point, when insurance companies will say that if you are at risk or have damage as a result of an action of the sea, you are not covered. That is why thousands of people around Australia are not covered by the insurance that they think they have got. This matter has been referred to the Law Reform Commission, because as damage starts to occur to houses around the coast and people find that they are not insured, they are going to find themselves in a position where they do not have the money to even demolish the house they have got—let alone get the insurance to build a new one.

The other situation is that local governments are giving out planning permission to build in areas that are vulnerable. Ultimately, insurers will not pay and the only option people will have is to sue the local council for allowing them build in the first place. I ask: why is it that these insurance companies have been able to force builders to be the reinsurers to guarantee maximum profits to Vero—which is owned by Suncorp Metway? Suncorp Metway has a substantial investment from the Labor Party. I am really looking forward to hearing the government telling us how much the ALP have got invested in this company. I will be delighted to hear if they no longer have an investment in that company. That will clear up one issue that I have in relation to findings that are always coming down from governments from one end of the country to the other.

I simply cannot understand why this parliament would not agree to reconvene the inquiry for a one-day hearing, given what I have just said about builders being in dire straits by Christmas, with 30 per cent of them forced into noncompliance and having to go to court to test the legality of whether the insurance companies actually can force them to become reinsurers. The inquiry would not have to take a whole lot more evidence but, firstly, review the evidence that was given by the insurance companies to see whether their evidence in relation to the percentage of claims that were rejected was true; secondly, look at the profitability, because the claims they made certainly do not match what the insurance ombudsman or the Victorian Essential Services Commission have had to say. I just want to have that evidence examined to see whether it was true or whether the Senate committee was misled.

The inquiry should then review the conclusions that the Senate committee reached, which were weak and did nothing to assist the consumer or the builders in this particular circumstance. It should also revisit the issue of whether the product should be mandatory or not. If the federal parliament could move to at least remove the mandatory nature of this product in the next month or two, that would stop these 30 per cent of builders from being forced into a position of noncompliance with the law, while we get things sorted out. That could be done in the course of a single day. That is not a lot for a Senate committee to do. It is about reconvening, examining those issues, getting rid of the mandatory nature of it and  checking that this particular insurance product is not exempt from oversight by these financial oversight bodies. It is critical that the committee be able to look at it, because it is not until you get reports from bodies like the Essential Services Commission and the ombudsman that you actually find out what is going on with this product. Once we get rid of the mandatory nature, then we can move quickly into next year to start looking for a harmonised system of consumer protection across Australia. Getting rid of it in the short term would help the 25 to 30 per cent of builders who are in trouble right now.

I am not asking for a comprehensive inquiry. We have had the inquiry. I am asking for an assessment of whether evidence given to the inquiry was true, whether the conclusions were valid, whether the claims being made now are true—that 25 to 30 per cent of builders are going to be noncompliant by Christmas because CGU and Lumley, plus the one other that is in the market, will have withdrawn and we will be left with only Vero and QBE, and those builders will be unable to get security.

We have had a lot of talk in this place about how people support small business. Oh yes, they support small business. If you do not support this reference you are not supporting small business in Australia; you are undermining it. Many of these builders are small to medium sized builders, and many of the companies that are contracted to them are also small to medium sized contracted businesses. You are putting the whole construction industry at risk by not re-examining this. This is not just my assertion; this is factual. This is also the claim of the insurance industry ombudsman and the Essential Services Commission from Victoria. Reject it if you choose to, but understand the ramifications. When this happens at Christmas time, come out and admit that you are the people who knowingly allowed it to happen. I urge the Senate to reconsider.