~ Emergency ~ IIIII Services Levy

INSURANCE --• MONITOR

ESLIM Quarterly Report to the Treasurer

Report 1

June Quarter 2016

NSW GOVERNMENT

Letter to the Minister

The Hon. Gladys Berejiklian MP Treasurer Minister for Industrial Relations 52 Martin Place Sydney NSW 2000

28 July 2016

Dear Treasurer

I am pleased to present the first quarterly report by the Emergency Services Levy Insurance Monitor on

the performance of the functions of the Monitor in accordance with section 11 of the Emergency Services

Levy Insurance Monitor Act 2016 (the Act) . The Act was assented to on 7 June 2016 and the Monitor

and Deputy Monitor were formally appointed on 8 June 2016. As required by section 11 of the Act, this

report relates to the period ending 30 June 2016.

Yours sincerely

Professor Allan Fels AO Emergency Services Levy Insurance Monitor

Table of Contents

Letter to the Minister

Table of Contents

Introduction

1 Background

1.1 Overview

1.2 Current Insurance-based Emergency Services Levy {ESL)

1.3 Future Emergency Service Property Levy

1.4 The Emergency Services Levy Insurance Monitor {ESLIM)

1.5 Creation of the Monitor's Office

2. Operations of the Monitor

2.1 Information, advice and guidance

2.1.1 Liaison with key stakeholders

2.1.2 ESLIM Website

2.1.3 Notices issued under section 30 of the Act

2.1.4 Media

2.2 Monitoring functions

2.2.1 Competitive environment

2.2.2 Monitoring premiums

2.2.3 Section 57 Notices

2.2.4 Tapering of ESL rates

2.3 Compliance activities

2.3.1 Guidelines relating to prohibited conduct

Appendix A- Guidance Letter

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Introduction

This is the first Quarterly report produced by the Emergency Services Levy Insurance Monitor (ESLIM)

for the Treasurer as requ ired under Section 11 of the Emergency Services Levy Insurance Monitor Act

2016 (the Act). Under the Act, the Monitor is to provide a written report to the Minister and Treasurer

within 28 days of the end of each quarter on the performance of the functions of the Monitor during the

quarter. As soon as practicable after the Minister receives the report, the Minister must publish the

report.

The Act was assented to on 7 June 2016 and the appointments of Professor Allan Fels AO as Monitor

and Professor David Cousins AM as Deputy Monitor, respectively were made on 8 June 2016. The

Monitor's Office commenced its public-facing operations on 5 July 2016. This report covers the period

until 30 June 2016.

1 Background

1.1 Overview

On 10 December 2015, the Treasurer and Minister for Emergency Services jointly announced 1 the

Government's intention to reform the way the emergency services funding operates by moving from an

insurance-based model to a property-based model. The rationale for the change is to create a fairer

system, where the funding for the emergency services will be shared by all property owners, not just

those who elect to take out property insurance. The abolition of the Emergency Services Levy (ESL) will

remove around $800m from the cost of insurance state-wide. The Ministers noted that the change will

reduce the cost of insurance and encourage more people to insure their properties.

1.2 Current Insurance-based Emergency Services Levy (ESL)

The majority of the funding for the NSW State Emergency Services, NSW Rural Fire Service and Fire

and Rescue NSW currently comes from levies imposed on property insurance policy holders. The NSW

Government determines the budgets for the emergency services authorities. The proportion of these

budgets to be funded by insurers, local governments and the State Government is set by legislation2.

Insurance companies provide 73.7 per cent of the total contributions required to fund the emergency

services organisations with the balance being provided by the Treasury (14.6 per cent) and Local

Councils (11 .7 per cent). The exact contribution of individual insurers depends on their market share of

premiums of specified insurance classes. Insurers make quarterly payments of their estimated

contributions to the Department of Justice, which in turn passes the funding to the emergency services

organisations. Adjustments are made at the end of the year based on the actual market shares of each

insurance company. Legislation does not specify how the insurance company contributions are to be

funded , but companies generally collect funds from policy holders by adding an amount, referred to as

the Emergency Services Levy (ESL) , to the base premium. GST and Stamp Duty are added on top of

this to give the final premium. With a few exceptions, companies are required to specify the ESL

component of premiums on policy notices to customers3.

1 Media release, "NSW moves to a fairer system for funding fire and emergency services", 10 December 2015. 2 State Emergency Service Act 1989 Part SA; Rural Fires Act 1997 Part 5; and Fire Brigades Act 1989 Part 5. 3 Section 80 of the Fire Brigades Act covers property insurance classes specified in schedule 1 of this Act.

1.3 Future Emergency Service Property Levy

From 1 July 2017 the Government intends to remove the ESL component from insurance premiums.

From this date on, the funding for emergency services organisations will be raised through a property

levy, called the Emergency Services Property Levy (ESPL), which will be charged alongside council

rates.

1.4 The Emergency Services Levy Insurance Monitor (ESLIM)

When announcing the emergency services levy reform on 10 December 2015, the Ministers also

announced the intended appointments of the two Monitors "to ensure that insurers pass on the cost

savings to consumers"4.

Professor Fels and Professor Cousins had performed similar roles for the Victorian Government, which

had earlier also moved to a property-based levy system for funding its fire services. They provided

advice to the NSW Government on the Victorian experience and were consulted on the proposed NSW

legislation. In early February 2016, the Treasurer wrote to the Monitors indicating that the Government

considers their roles in NSW to have already begun5.

The Emergency Services Levy Insurance Monitor Bill was introduced to the Parliament on 3 May 2016

and subsequently passed without amendment on 31 May 2016. It was assented to on the 7 June 2016

and the Governor in Council approved the appointments of Professor Fels and Professor Cousins on the

following day.

In the Second Reading the Treasurer noted:

"The NSW Government is building on the lessons learned from Victoria, the most recent State to reform

the funding of their emergency services. One of the key lessons was the need to establish an insurance

monitor well before the date on which the insurance levy is abolished. The bill acts upon that lesson. By

establishing the consumer protection framework now, before legislation abolishing the ESL is introduced,

the Government is providing a framework that will enable insurers to gradually transition insurance prices

so that the ESL will be fully removed from insurance prices by 1 July 2017.

"Oversight of the industry will continue until the end of 2018 .. ... Until the end of 2018 insurers will be

prohibited from engaging in price exploitation or false and misleading conduct regarding the effects of

the ESL reform. These prohibitions will be subject to civil penalties of up to $10 million, which is a hefty

fine. Price exploitation is when an insurance company does not pass on to consumers the full reduction

in cost from the abolition of the insurance-based levy or seeks to recover more in fire services levy from

4 Media release, 10 December 2015. 5 Letter from the Hon. Gladys Berejiklian, MP, Treasurer to the Monitors, 19 February 2016.

policy holders than the insurance company is required to remit to the Government. The monitor and

deputy monitor will help to ensure this does not happen.''6

Functions of the Monitor

The main functions of the Monitor, as prescribed under section 9 of the Act, are to :

• provide information, advice and guidance in relation to the emergency services levy reform

and prohibited conduct,

• monitor prohibited conduct and compliance with the Act and the regulations,

• monitor prices for the issue of regulated contracts of insurance,

• monitor the impact of the emergency services levy reform on the insurance industry and levels

of insurance coverage,

• prepare and publish guidelines relating to the operation and enforcement of the Act and the

regulation

• receive complaints about prohibited conduct and to deal with them in accordance with the Act,

and

• investigate and institute proceedings in respect of prohibited conduct or any contravention of

the Act or the regulations.

Under section 10 of the Act, the Monitor can monitor prices for the issue of regulated contracts of

insurance during the period from 1 July 2014 to 31 December 2018. The Monitor may take action against

prohibited conduct occurring between 10 December 2015 (being the date the reform was announced)

and 31 December 2018.

Section 7 provides for the independence of the Monitor in performing these functions under the Act. In

particular, the Monitor is not subject to the control and direction of any Minister in respect of the exercise

of the monitor's functions in respect of a specific matter or complaint. "7

The Act does, however, provide that the Minister administering the Act may issue a general direction in

writing to the Monitor in respect of the exercise of the Monitor's functions under the Act. Any general

direction of this kind must be published in the Gazette as soon as practicable after it is issued to the

Monitor and must be complied with by the Monitor.

Section 7 provides an important assurance for the community and insurance providers that the actions

and decisions of the Monitors will be based on objective criteria, consistently applied and not influenced

6 The Hon. Gladys Be rejiklian, Treasurer, Second Reading Speech Emergency Services Insurance Monitor Bill 2016, 11 May

2016. 7 Section 7(2) .

by other inappropriate or non-transparent considerations. The Monitor recognises that his independence

needs to be accompanied by strong accountability and transparency. The requirement to produce

quarterly reports is an important aspect of this accountability and transparency.

1.5 Creation of the Monitor's Office

The Monitor is an independent statutory authority reporting to the Treasurer. The Treasury has been

responsible for the development of the Act and the policy relating to the emergency services levy reform.

The Monitor has liaised closely with the Treasury as appropriate. Admin istrative support for the Monitor

is provided by the Commissioner for Fair Trading and the Secretary, Department of Finance, Services

and Innovation (DFSI. The Commissioner has seconded an officer to assist in obtaining office space

and initial staffing for the Monitor's office. Separate and secure office accommodation has been obtained

on level 9 of the McKell Building, 2-24 Rawson Place, Sydney. Human, financial , technical and legal

services are being provided to the Monitor by the DFSI.

The Monitor has entered into arrangements for NSW Fair Trading to provide call centre services to assist

it in providing information to consumers about the removal of ESL from insurance premiums. An ESL

Insurance Monitor hotline has been established (1300 607 723) with just one call received by the end of

the quarter. Industry calls are expected to be directed mainly to the Monitor's Office. NSW Fair Trading

is also able to assist the Monitor with the handling of consumer complaints, although the Monitor will also

have the facility to deal directly with written complaints.

At the end of June, the Monitor had four temporary staff. Steps are in train to recruit a Director and staff

to cover the period until 31 December 2018. A staff establishment of 10-12 has been provided for with

scope to engage consultants as needed.

A separate website has been established for the Monitor. This became operational shortly after the Act

was passed. The web address is: http://www.eslinsurancemonitor.nsw.gov.au

After 31 December 2018, when the Monitor ceases operations, any outstanding consumer complaints,

litigation or other matters will be passed to NSW Fair Trading for resolution 8.

8 The Act as passed made specific reference to any on-going court proceedings and amended the Fair Trading Act 1987 Schedule 5 Part 8.

The diagram below provides a timeline of activities of the Monitor. Monitoring of premiums may extend

over the period 1 July 2014 to 31 December 2018, when the Monitor's role ceases to exist. The ESL will

be replaced by the Emergency Services Property Levy (ESPL) on 1 July 2017. As discussed in the

report below, the Monitor provided preliminary guidance to insurance providers on 12 April 2016 and

issued formal notices to collect information on insurance policies to companies on 17 June 2016.

Timeline of activities of ESLIM

Levy collected by insurance companies in form of ESL Levy collected by counci ls in form of ESPL

12 April insurance <os.

Guidan ce letter sent to in<.u r;mrP ro~ .

31 M ay

Monitor Act passes llarliament

Assent of Monitor Act Monitor & [ ·ellU ty Monitor il(l llOinted

ESLremoved by 30/6/l 7 - ESPL commencesl/7/l7 I

Key

Quarterly repor ts - due 28 days after cru arter end

D Period of Price Monitoring 1/7/ 14 to 31/12/18

ESLIM ceases to exist

2. Operations of the Monitor

Information about the operations of the Monitor to 30 June 2016 is provided below. The key functions of

the Monitor as set out in section 9 of the Act have been split into 3 separate sections for reporting

purposes: Information, advice and guidance; monitoring functions; and compliance activities.

2.1 Information, advice and guidance

The Monitor will seek to ensure the community is aware of the Monitor's role and the protections

provided under the Act. Policy holders will be encouraged to bring concerns they may have about the

ESL and insurance premiums to the Monitor. The Monitor will also work to ensure insurance providers

are aware of their obligations under the Act.

To facilitate public awareness of the Monitor and its role, the Office is putting in place a comprehensive

communications strategy covering residential and commercial consumers and insurance providers. The

aim is to have vital information about the removal of the ESL available to all in NSW. Key aspects of the

strategy include liaison with key stakeholders, the establishment of a dedicated website and hotline, the

prescription of information to be supplied by insurance providers and use of the media.

2.1.1 Liaison with key stakeholders

Over the last few months, the Monitors have met with relevant Ministers, Treasury and Office of

Emergency Management officials in the Department of Justice, individual insurance companies and

insurance brokers, and representative bodies, including Insurance Council of Australia , National

Insurance Brokers Association, Lloyd 's Australia , Financial & Consumer Rights Council Inc. and the

Consumer Action Law Centre.

The industry meetings have provided an opportunity for the Monitors to gain insights into how the

insurance industry is planning to address the removal of the ESL and gain an understanding of the

current business environment faced by the insurance companies. The meetings have also provided

opportunities for the Monitors to outline their expectations of insurer conduct in relation to the removal of

the ESL. Meetings, often more than one, had been held with nearly all the leading insurers by the end of

the quarter, with on-going liaison arrangements agreed in most cases.

2.1.2 ESLIM Website

The ESLIM website has been established to provide information to the general public as well as to the

insurance industry. The site: www.eslinsurancemonitor.nsw.gov.au, was launched on 14 June 2016. The

initial content of the launch site was the minimum viable product, providing brief information on the role

of the Monitor. The ESLIM site links to other relevant sites including the Treasury ESPL website, and

Services NSW as well as linking to the legislation and media releases . Content will to be added regularly

in response to the changing needs of consumers or to publish relevant information .

The initial website has been designed with the capacity for more information and functionality to be

added over time, and stage 2 is already being planned. This will enhance the customer experience and

assist in providing customers with a greater understanding of how the ESL reform will impact them, and

how they can register a concern or complaint with the Monitor.

The Monitor's role is limited to the ESL. NSW Treasury hosts a website providing opportunities for

consumers and policyholders to obtain information about the new ESPL. The website includes

information about four key topics: About the ESPL, Contributing to the ESPL, Frequently Asked

Questions and contact information. The ESPL website links directly to the Monitor's website. ESPL

website: http://www .emergencyservicespropertylevy. nsw.gov .au

2.1.3 Notices issued under section 30 of the Act

Under section 30 of the Act, the Monitor may choose to publish a notice in the NSW Government

Gazette as a means of informing the public of important information relating to the emergency services

reform and the role of the Monitor. The Treasury proposed to the Monitor that a notice that it had

proposed to insurance industry representatives be gazetted under section 30 of the Act. The Monitor has

consulted with the Insurance Council of Austral ia on the notice and how it should be used by insurers, or

persons representing insurers. These consultations were continuing by the end of the quarter.

2.1.4 Media

The media will be a key means by which the activities of the Monitor will become known to the public. To

be effective it will be important that the Monitor establishes a significant media profile. Media coverage

relating the Monitor has been limited to date. A number of articles appeared around the announcement

of the intended emergency services levy reform, made by the Treasurer and Minister for Emergency

Services on 10 December 2015. A formal launch of ESLIM by the Treasurer and the Monitors was in

planning at the end of the quarter.

2.2 Monitoring functions

The Monitor expects the full impact of the removal of the ESL to be passed through to policy holders.

The Monitor has substantial powers to obtain information about premium movements over time and will

not hesitate to take action against insurers who engage in unreasonable pricing or fraud or misleading

conduct in relation to the emergency services levy reform .

Full pass-through of the levy reduction to existing and new policy holders is more likely to occur if the

industry is highly competitive and not under severe margin pressure. Accordingly, the Monitor will also

need to gain a sound appreciation of competition and cost, margin and profit pressures in the industry.

Typically, the industry has been subject to cyclical pressures where margins have expanded or been

squeezed. When the margins are tight, the pressure to increase premiums is greater. Even at this early

stage of the Monitor's operations, insurers are pointing to such pressures. The Monitor's clear view is

that the removal of the ESL should not be considered an opportunity for insurers to lift margins. Where

this occurs the Monitor will closely scrutinise the underlying basis for any base premium increases.

2.2.1 Competitive environment

The general insurance industry is characterised by moderate levels of concentration on the supply side

and relatively high and stable returns. Experience of the Victorian Fire Insurance Levy Monitor was that

there were constraints on the demand side of the industry which inhibited competition. In particular, low

rates of customer switching and limited general awareness of the differences in premiums between

suppliers for similar coverage and risks were factors limiting competition between insurers.

In 2014-15, 173 organisations paid contributions to the Department of Justice for the ESL. This number

includes insurance companies, as well as a number of brokers and self-insurers. The total contribution in

that year paid by these companies was $715m. The top 10 contributors accounted for close to 80% of

contributions, as shown in the table below. Some companies have multiple brands and consumers often

do not recognise that brands may belong to the same company

Rank Company $m Contributions in 2014-15 % market share

#1 AAI Ltd {Suncorp) 140.6 20

#2 Insurance Australia Ltd 137.8 19

#3 QBE Insurance (Australia) Ltd 72.8 10

#4 Allianz Australia Insurance Ltd 51.5 7

#5 CGU Insurance Ltd 49.5 7

#6 WFI Insurance Ltd 27.6 4

#7 Commonwealth Insurance Ltd 25.6 4

#8 Zurich Australian Insurance Ltd 23.0 3

#9 Westpac General Insurance Ltd 20.2 3

#10 AIG Australia Ltd 13.8 2

Top 10 contributors 562.5 79.0

Total contributions 715.0 100.00

The industry has generally been regarded as having low barriers to entry. Licensing and capital

requirements do present barriers to entry, but the shift to on-line services has reduced the barrier

imposed by having to have well established distribution systems. Brokers also play a key role in

distribution, especially in the commercial side of the industry. Supply side switching between general

insurance market segments and jurisdictions can readily occur. There has been some relatively recent

entry from challenger brands and the threat of disruption from non-traditional competitors seems to be

high. Industry commentators have suggested that the scope for significant organic growth by companies

is limited given the maturity of the market. The opportunity given to companies by the removal of ESL

however goes against this. The significant reduction in premiums expected to occur as a result of the

removal of the ESL should result in a large increase in the number of policies sold by insurers.

There has been some significant merger and acquisition activity in the general insurance industry in

recent years. In 2015, the two notable transactions were the investment by Berkshire Hathaway into lAG

and the acquisition of Asset Insure by CBL Corporation. The other sign ificant recent acquisition was

lAG's purchase of the Wesfarmers insurance underwriting business in 2014.

KPMG has commented on recent national general insurance cost price and profit trends. It suggests the

gross written premium for general insurers in 2014/15 remained almost constant at $32.47 billion

compared to the previous year. However, industry profitability declined by 23.6% from $4.89 billion to

$3.73 billion9 "reflecting strong competition and multiple weather events." Despite the limited premium

growth, the industry expense ratio remained constant over the past 5 years at approximately 26%.The

negative profit trend was offset to some extent by improving investment income which increased by

20.4% by from the previous year to $1.97 billion 10.

The ESLIM will continue to develop its understanding of competitive forces affecting the industry and of

cost, price and profit trends. It will consider ways to empower consumers so they can contribute to the

goal of ensuring full pass through of the cost savings from abolition of the ESL.

2.2.2 Monitoring premiums

The ESLIM is developing a strategy for monitoring premiums over the period 1 July 2014 to 31

December 2018. A particular focus will be on the period after 10 December 2015 when the emergency

services levy reform was announced. The Monitor's key concerns are:

to ensure there is no anticipation of removal of the ESL by insurers increasing base premiums

in the period leading up to 1 July 2017,

9 KPMG- General Insurance Industry Review 2015 1° KPMG- General Insurance Industry Review 2015

to ensure premiums are reduced by the full extent of the cost savings arising from removal of

the ESL, and

to ensure there is no over-recovery of contributions paid to the Department of Justice for 2015-

16 and 2016-17 through the revenue raised by insurers through ESL rates.

The Monitor will utilise the information gathering powers under the Act to obtain information on premiums

and ESL revenues from insurers and people acting on their behalf. A planned approach to monitoring

activities will help to ensure the inevitable burden of information requests is minimised.

2.2.3 Section 57 Notices

In her second reading of the Emergency Services Levy Insurance Monitor Bill , the Treasurer noted that

the legislation would "allow the Monitor to obtain insurance data and pass this information to NSW

Treasury to be used to model the effects of different options for the proposed ESPL. This data is crucial

to understanding the impacts of the ESPL on different sectors of the community so that we can ensure a

fair system is designed. " In line with this objective, the Monitor issued notices to 120 insurance

companies, brokers and underwriters identified as contributing to the ESL on 17 June 2016, with a

deadline for submission to the Monitor of 8 July 2016. The notices were common to all recipients . The

contents of the notice had been discussed with industry representatives by the Treasury prior to

commencement of the Act and the notice issued by the Monitor sought this comprehensive property

insurance data as at March 2016. The Monitor is to provide copies of the responses to the Treasury

under an Information Sharing Agreement provided for in section 75 of the Act. The data will assist

general monitoring by the Monitor.

2.2.4 Tapering of ESL rates

The Monitor is aware of concerns held by insurers about being able to raise sufficient revenue to cover

their required contributions in 2016-17 due to a belief that consumers may choose to avoid taking out or

renewing insurance policies as the transition date of 1 July 2017 is approached, in an attempt to avoid

paying ESL. This seems to be a concern particularly affecting the commercial sector where brokers have

a strong influence on price sensitivity.

To overcome this issue, insurers have proposed tapering of ESL rates (sometimes referred to as 'front­

loading') . This involves increasing rates above existing levels in earlier months and reducing these to

significantly lower levels in later months of the year closer to the transition date.

The Monitor considers that each company should make its own decisions as to how they recover their

contributions to the emergency services organisations. However, in addition to ensuring there is no over­

recovery of contributions through the setting of ESL rates, the Monitor is concerned to ensure rates are

set fairly between policy holders. This means that any tapering of ESL rates throughout 2016-17 should

be moderated so that rates charged to policy holders are fair.

2.3 Compliance activities

The Act prohibits price exploitation, or the setting of unreasonably high prices for regulated contracts of

insurance having regard to the emergency services levy reform and other matters, and engaging in fa lse

or misleading conduct in relation to the emergency services levy reform . Penalties of up to $10 million for

bodies corporate and $500,000 for individuals apply where contraventions are demonstrated. These

sanctions apply, equally, to any person who aids, abets, counsels or procures another person to engage

in the prohibited conduct; induces another person to engage in this conduct and conspires with another

person to do so.

The bulk of the Monitor's work in relation to compliance is expected to relate to examining complaints

and conducting investigations into alleged contraventions of the two statutory prohibitions. Compliance

activity may also arise in relation to other offences under the Act, for example failure to comply with a

statutory notice.

The major compliance activity undertaken to date by the Monitor concerns the development of guidelines

in relation to the price exploitation and false and misleading conduct provisions of the Act. This work is

briefly discussed below.

2.3.1 Guidelines relating to prohibited conduct

Following the announcement of the Government's intention to implement the emergency services levy

reform on 10 December 2015 and during the development stage of the legislation , the Treasury

consulted with the Insurance Council of Australia on the operation of the guidelines which applied under

the Victorian fire services levy reform. In February 2016, the Treasurer also wrote to the Monitors

indicating that "one of your first priorities should be the development of pricing guidance which can be

provided to the insurance industry covering the period of transition . I ask that you consult with the

insurance sector prior to passage of the Monitor legislation to outline your intended approach."

A particular concern of the insurers was their ability to recover fully in premiums their contributions to the

emergency services organisations in the final year of the insurance-based funding scheme. The

Treasurer indicated to the Monitors that until 1 July 2017, when the property levy would replace the

insurance levy, "the Government expects insurers will continue to set prices at the level necessary, in

aggregate, to meet their tax obligations over the 2015-16 and 2016-17 years."

On 12 April 2016, the Monitors wrote to insurers to indicate that the Monitor intended to produce

guidelines when the legislation was passed and to provide an early indication of the Monitor's views on a

number of relevant matters. In particular, the Monitor noted that he "recognises that insurers will need to

recover their contribution to the emergency services organisations over the 2015-16 and 2016-17 years

through their premiums, including ESL rates. Any tapering of ESL rates throughout 2016-17 should be

moderated so that rates charged to policy holders are fair." Further, the Monitors indicated that insurers

would be required "to demonstrate that there has been no over-recovery of ESL over 2015-16 and 2016-

17 combined. Any over-recovery of ESL will be required to be refunded to policy holders. Where the

Monitor agrees it is not practical to refund individual policy holders, alternative arrangements will be put

in place." A copy of this letter is attached as Appendix A.

Since this time the Monitors have further consulted on guidelines and issued draft documents for

comment by industry stakeholders as well as any other interested parties. Separate guidelines have

been developed covering the price exploitation and false and misleading conduct prohibitions. The

guidelines will be settled following consideration of comments received.

The Guidelines on the prohibitions against price exploitation and false and misleading conduct will be

issued under section 21 of the Act. The Act provides that the Monitor must have regard to the guidelines

against price exploitation in deciding whether to issue contravention and prevention notices. Under

section 16 of the Act, a contravention notice may be issued to an insurance company by the Monitor if

the Monitor considers the company has contravened the prohibition on price exploitation. Under section

17 of the Act, a prevention notice can be issued to an insurance company by the Monitor if the Monitor

considers that doing so will aid the prevention of price exploitation . The Monitor is required to include in

the quarterly report particulars of any notice given under section 17. No notices have been issued under

section 17 to date.

Appendix A- Guidance Letter

Emergency Services Levy INSURANCE MONITOR

Chief Executive Officer Company name Company address

Emergency Services Levy Reform

EMERGENCY SERVICES LEVY INSURANCE MONITOR Leve l 9, McKell Building, 2-24 Rawson Place, SYDNEY NSW 2000

12 April2016

As you will be aware, the NSW Government announced on 10 December 2015 that it plans to abolish

the current insurance-based Emergency Service Levy (ESL) and replace it with a property-based levy.

Legislation is currently being prepared to implement this reform . On the insurance side, a Monitor is

being appointed with a key objective of ensuring that the removal of ESL will be fully passed on to policy

holders through lower total premiums and that no unfair advantage is taken of the change. The

Government has indicated that the legislation establishing the Monitor will be similar to the legislation

adopted in Victoria when that State introduced a similar reform in 2012-13. This included provision for

the Monitor to issue guidelines relating to the operation of the law.

The Government has announced the appointments of Professor Allan Fels AO as Emergency Services

Levy Insurance Monitor and Dr. David Cousins AM as Deputy Monitor. The Treasurer, Ms Gladys

Berejiklian MP, has written to us indicating that the Government considers these roles to have already

begun and requesting that we consult with the insurance sector prior to passage of the Monitor

legislation to outline our intended approach .

In line with the Government's request, we can confirm a number of key aspects of our approach to

monitoring of insurer conduct and pricing over the transition period .

First, when the legislation is passed we anticipate that the Monitor will issue formal guidelines covering

the main prohibitions specified in the Act, which are expected to relate to unreasonable pricing and false

or misleading conduct in relation to the Emergency Services Levy reform . The Victorian guidelines

provide a starting point for these guidelines, but as circumstances in NSW are not identical to those in

Victoria , modifications to the Victorian guidelines may be appropriate. Insurers are invited to provide

comments on guidelines to the Monitor. It would be helpful if these could be provided by 6 May 2016.

Second, the Monitor will expect that the fu ll impact of the elimination of the ESL will be passed through to

final premiums.

' <

Third, the Monitor expects that insurers will make their own independent decisions as to how they

recover their contribution for ESL in the transition period . The Monitor recognises that insurers will need

to recover their contribution to the essential services organisations over the 2015-16 and 2016-17 years

through their premiums, including ESL rates. Any tapering of ESL rates throughout 2016-17 should be

moderated so that rates charged to policy holders are fair.

Fourth , the Monitor will require insurers to demonstrate that there has been no over-recovery of ESL

over 2015-16 and 2016-17 combined . Any over-recovery of ESL will be required to be refunded to policy

holders. Where the Monitor agrees it is not practical to refund individual policy holders, alternative

arrangements will be put in place.

Fifth, the Monitor will require that insurers and brokers clearly communicate to policy holders the effect of

removal of the ESL on total premiums. We consider this would be best achieved by providing a

comparison of current and past premiums on insurance renewal notices.

Individual insurers are welcome to discuss their proposed approaches to pricing and communications

with policy holders in confidence with the Monitor and Deputy Monitor. These discussions may help to

clarify intentions and provide greater certainty. Contact with the Monitor's Office in the first instance

should be with Mr Robert Chalmers, A/Business Operations Manager, email:

monitor@finance.nsw.gov.au. It would be helpful if you could provide details of where future

correspondence from our Office to your company could be best directed.

Yours sincerely

Professor Allan Fels AO Dr. David Cousins AM

Monitor Deputy Monitor