Builders awaiting insurance plan

The Western Australian housing industry is eagerly awaiting the state government's release of a discussion paper to determine its direction over builder's warranty insurance.

Master Builders Association WA director of housing and economics Gavan Forster told WA Business News the government's announcement of how it will respond to the withdrawal of Australia's largest builder's warranty insurer, Vero, was imminent.

Currently in WA builders' warranty insurance is required for all new homes or renovations over $20,000.

Mr Forster said the government's discussion paper would provide some much-needed certainty for builders.

"Builders would be planning and signing up contracts to start in June and when they are doing their pricing they need to have confidence of what to include in their price," Mr Forster said.

"But also, more importantly is that they are going to be able to deliver the product to consumers, because if the insurance is not around the industry will stop dead.

"For builders they want that certainty, in terms of their own internal work load, scheduling, trades and so on, it's important to have that certainty so production can continue unabated. "

Vero's exit was prompted by the New South Wales state government's decision to underwrite builders' warranty insurance in its own right from July 1, and will leave the builders' warranty insurance market in WA with one major provider, QBE.

QBE currently holds a 30 per cent market share in WA, with Calliden holding a 5 per cent share.

Last week Commerce Minister Troy Buswell told a press conference the government had two options; to introduce a voluntary scheme of builder's warranty insurance as employed in Tasmania, or to provide the insurance in its own right, as New South Wales has decided to do.

Mr Forster said he didn't think the government would push to offer the insurance in its own right because of the inherent risk and costs involved in setting up a fidelity fund.

He estimated a typical indemnity insurance premium would be from $300 to $700 per typical house, and for larger dwellings, up to $1,000 or more.

"When you multiply that by 20,000 (homes each year), there's a lot of money that goes into the pool, so the plan would be that the builders would contribute an amount to the fidelity fund to cover potential losses," Mr Forster said.

"But Treasury is going to be concerned in the first year if a big builder goes belly-up and there's not much in the kitty.

"They're concerned about the risk and having to underwrite that, but over time it would probably build up and have enough in the kitty even if a big builder did go down."

Mr Forster said the situation was reminiscent of the 2000 collapse of HIH, which left WA with only one major builders' warranty insurer, Vero.

"That was just terrible for builders who had to get director's guarantees and put up lots of funds into the business.

"The bar was raised so high that it was unachievable and they basically said 'well you take it or leave it.'

"We would be concerned about that because our rule of thumb is that government should only intervene when there is market failure.

"Its demonstrated pretty clearly in the year 2000 when HIH collapsed, and now when Vero withdraws, the market will have failed in terms of private providers not being around to administer the insurance.

"When you're left with one, QBE, in effect in a monopoly, we wouldn't want that situation occurring where they could basically set whatever they like on the industry."