A Risk Perspective For Insurers
The Emergency Services Levy (ESL) is a complex tax that needs an end-to-end process, from setting targets through to monitoring actual experience. This process naturally gives rise to risks that may have material financial, compliance, operational, and reputational implications for insurers.
This article builds on our previous discussion of ESL complexity, and provides updates on recent developments, as well as outlines the key risks involved along with suggested risk mitigation approaches.
Background
Our first ESL article was published in October 2023. Shortly after, in November 2023 the NSW Labor Government announced a commitment to reforming ESL following a failed attempt to do so under the Liberal/National Coalition government in 2017. Here is a timeline of recent NSW ESL developments:
What has and what has not changed?
The ESL Monitor Act led to the changes summarised in the table to the left. To date, significant uncertainty remains regarding potential reforms and their financial implications for insurers.
Risks to insurers
Setting ESL rates itself is a complex exercise, requiring assumptions about future market behaviour, and collection outcomes, often by entities with no business in some of the markets requiring estimation.
With the introduction of the new ESL Monitor Act, there are more risks to insurers. In addition, certain definitions in the new Act are important but unclear, particularly around what constitutes an “unreasonably high” price and when the refund undertaking is required to be triggered in practice.
In response, we have outlined an approach to the setting of ESL rates that considers the risks and utilises risk management techniques including the application of a risk register with a range of potential mitigation strategies.
Key Risk Areas and Mitigation Overview
PFS role in risk mitigation
The table above highlights that there is no single solution to eliminate ESL risks, though they can be managed to a more acceptable tolerance level.
PFS provides solutions to manage ESL risks, acting as a risk mitigation partner that eases internal workload and advising on each of the risk mitigations listed in the table above.
Our services include:
- Tracking of regulatory developments
- Providing market intelligence based on current data (covering 90% of market)
- Direct engagement with the Insurance Council of Australia and regulators to obtain ESL clarifications
- Individual support using PFS tools to help you set and monitor ESL rates aligned with your targets
- Supplying documentation to support the ESL management process for internal and compliance purposes
- Monitoring industry ESL outcomes and issuing early warnings for proactive action
PFS continues to serve as the as the markets clear ESL subject matter expert.
