Understanding your premium

The total premium you pay for your property insurance cover is made up several components, some of which are set by your insurer, and others set by government.
For example, a home and contents insurance policy in NSW will include: Base premium, Emergency Services Levy (ESL), GST and stamp duty.  

  • Base premium: The insurer sets a base premium, based on what it believes is required to take on the risk associated with the policy (see below).  
  • ESL is charged as a percentage of the base premium at a rate set by each insurer (rates vary according to insurer and type of policy).  
  • GST is charged on the sum of base premium and ESL, at a rate set by the Federal Government (10%).  
  • Stamp duty is charged on the sum of the base premium, ESL and GST amounts. Stamp duty is set by the State Government.  For home and contents policies, the rate is 9%.

Example premium

Home & contents and Motor insurance premium

Here is an example of the component parts of a typical home & contents and motor insurance policy.

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*Average ESL rate, as set by insurers. Source: Insurance Monitor's survey December 2018

Home and contents insurance policy documents must by law, separately identify the base premium, ESL, GST and stamp duty.  This requirement does not apply to motor insurance.

To make the pricing of premiums more transparent,  the Insurance Monitor is requiring NSW insurers to provide additional premium information on renewal notices.

From 1 July 2019 individual policyholders and small businesses should receive renewal notices showing the premium they are being charged this year alongside the premium they were charged last year for the following classes of insurance: home, contents, personal effects, motor and commercial property.

Premium components

Base Premium

Insurance is based on a pooling concept where customers contribute to an insurance pool through premium payments, so they can be compensated should an insured event arise. Typically, the insurer sets the base premium (or price) by reference to a range of factors including the likelihood of a claim by the insured (which in turn is based on an assessment of the risk of the person or item being insured), reinsurance, expenses, investment income, cost of capital and profitability targets. 

Table 1: Cost component ranges 

Cost component Component cost range provided by selected insurers
Reinsurance costs Range from 4% to 26% of the base premium
Expected claims cost (inc. catastrophe claims) Range from 54% to 72 %
Administrative costs (excluding most other overhead costs, but including commissions) Range from 11% to 32% of the base premium
Profit margin or cost of capital

Dependent upon required profit margin of the individual insurer

Source: Insurance Monitor's Public inquiry 2017

Insurers generally set the premium price in two-steps:  

  1. First, a ‘technical’ price is set, which reflects an actuarial view of the risk being insured and the characteristics of the insured, with the size and frequency of potential claims.  
  2. The insurer factors in specific business or commercial considerations.  

As a result, the eventual base premium price quoted may be different to the ‘technical’ price (either higher or lower).

The expected cost of claims experienced by an insurer is indicated above as the biggest factor affecting pricing.

 Attached below is a research paper exploring the current claims environment.

 

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Pdf size: 203KB

Emergency Services Levy (ESL)

The Emergency Services Levy (ESL) is added to the base premium by your insurer.

Insurers insuring against loss or damage to property located in NSW are required to provide the State Government with funding for the fire and emergency services each financial year.  Insurers may reclaim this amount from their policyholders in the form of an ESL.  

There is no legislation requiring insurers to charge ESL on insurance policies. Insurers individually decide the rate of ESL which will allow them to collect sufficient funds from their policyholders to cover the cost of the contribution they must make to the Government.

The ESL rate is charged as a percentage of the base premium.  At a given ESL rate, a larger base premium will attract a larger dollar amount of ESL.

The Insurance Monitor ensures that insurers do not seek to collect more in ESL from their policyholders than they are required to pay to the NSW Government for the 2016 and 2017 financial years combined, as well as for the 2018 and 2019 financial years combined.

Goods and Services Tax (GST)

Under Australian tax law, most types of general insurance are subject to a Goods and Services Tax (GST) of 10%.  GST is charged on the insurance premium collected by insurers, including the ESL amount.
ESL is included in the calculation of GST as it is an amount set and collected by the insurers.   Therefore both the base premium and the ESL are considered a taxable supply for accounting purposes, and are both subject to GST.
The relevant legislation regarding GST and general insurance can be found under Division 78 of A New Tax System (Goods and Services Tax) Act 1999. 
If you're insuring a business that is registered for GST, you can claim a full or partial credit for the GST included in an insurance policy premium covering a business asset.

Stamp duty

Duty is payable when a premium or instalment is received by an insurer.  While ESL is considered part of the premium for taxation purposes, stamp duty is not. Stamp duty is therefore not subject to GST and must be calculated after GST has been added. 
Stamp duty is a separate NSW Government requirement.  The rate of stamp duty varies depending on the type of insurance:

  • Home & contents insurance = 9%
  • Motor vehicle, aviation insurance = 5%

For more information: https://www.revenue.nsw.gov.au/taxes/insurance

Total premium

The total premium is the amount you are required to pay to your insurer.  This includes all costs and charges made by the insurer and other entities as outlined above.
The following is a graphical representation of the example home & contents and motor insurance policies. 

Table 2: Premium components by category

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