COMPULSORY INSURANCE ON HOLD

Amid concerns about providers’ ability to meet demand, the Government has postponed ruling on the introduction of mandatory insurance cover for builders. As MBIE conducts further research into the subject, including non-regulatory options, we look at the possible effects mandatory insurance could have on the industry

Current legislation requires builders to advise clients whether or not they can provide a builder’s warranty insurance product, but evidence suggests this has not led to increased uptake.

Estimates put the current proportion of builds with insurance at 40-50%. As part of its proposed Building Law Reforms, the Government proposed making insurance mandatory for:

• Residential new builds.
• Alterations over $30k;
• Alterations over $100k; or
• Alterations involving structural or weathertightness work.

Under Construction looks at what effects it could have on builders and homeowners, should any of these compulsory options goes ahead.

Short-term pain, long-term gain? 

From the homeowner’s perspective, there would be an initial increased upfront cost – approximately $2,000 for a $500,000 build. On the flipside, the risk of homeowners being left out of pocket if a builder goes bust should be reduced.

According to Ben Rickard from BuiltIn Insurance, the risk would be reduced because builders would need to satisfy an insurer’s screening process, which usually includes proving that their business is financially stable.

“As a result, there would be an improved market of builders for homeowners to choose from, ideally containing fewer builders who are likely to go bust.”

What’s in it for you? 

From a builder’s perspective, mandatory insurance could have a significant impact.

For those builders already offering insurance, it could ‘even the pricing field’ with those who do not currently offer insurance. It should also ensure more sustainable margins for the industry as a whole, because, in order to satisfy an insurer they won’t go bust, a builder would need to demonstrate a commitment to or history of making sustainable margins.

Mandatory insurance would also relieve the builder of the unenviable task of selling the homeowner a product that can put them in questionable light. Instead, insurance would simply be a standard part of the package (though one that a homeowner could potentially actively opt out of, if any mandatory scheme included an opt-out clause).

Insurance companies vetting builders would also provide a kind of proxy minimum standard of financial stability and competency, though Ben says that doesn’t necessarily mean that previously bankrupted builders wouldn’t be able to get insurance.

“Each application for insurance would be assessed on its merits. Whether previous insolvency was the result of unavoidable market conditions, such as the GFC, or a result of the builder not paying their tax bill or under-pricing jobs, would need to be understood by the insurer before making their decision on whether to offer insurance.”

Good for the industry?

Ben suggests the key benefit to the industry would be the likely removal of builders whose businesses aren’t financially viable or whose building quality is poor from the market.

Those builders who can’t satisfy an insurer wouldn’t be able to get insurance, therefore wouldn’t be able to build – at least on projects above any financial level the Government determined.

“It seems likely this would contribute to a move away from ‘race to the bottom’ pricing and assist in establishing sustainable margins in the industry.”

Can the insurance market handle it? 

One of the key reasons MBIE has decided to defer its decision on mandatory insurance is the need to ensure the insurance market has the capacity to provide for it. One of the main players in the builder’s warranty market, Stamford Insurance was supportive of the concept but hesitant about ability to deliver, saying:

“Stamford is very supportive of government intentions to improve consumer protection and believes every new home and significant building contract should come with an independent ten-year warranty. However, a compulsory scheme would be untenable in the present market with such a high demand for new homes against the background of a limited insurance market. Obviously, any proposals must not harm the supply side.”

However, Ben has a different view of the market’s capacity: “Builtin has the systems and experience to scale up both the assessment of builders wanting to offer warranty insurance and the processing of a large increase in warranty applications. While the appetite and experience of NZ-based insurers for this type of cover may be limited, there’s always capacity in specialist markets overseas, as long as the numbers stack up, which a mandatory scheme would deliver.”

What next? 

When asked in January 2020 what happens next, MBIE commented: “Cabinet has deferred making decisions on whether to make guarantee and insurance products compulsory. Instead, Cabinet has directed MBIE to undertake further work, including on non-regulatory options that may support the growth of the market. MBIE is to report back to the Minister for Building and Construction later in 2020. This advice would inform any future Cabinet’s decisions on whether to make guarantee and insurance products compulsory”.

Until then, builders have four existing options for insurance:

• Join the Registered Master Builders Association to access member-only insurance.
• Join the New Zealand Certified Builders Association to access member-only insurance.
• Become accredited with Builtin Insurance.
• Register and be approved by Stamford Insurance.

Each option has its pros and cons, but all have membership or assessment criteria you must meet before accessing their guarantee or insurance.