An act in transition, are you prepared for a fire levy increase?

The Fire and Emergency New Zealand levy has changed, and we will see more changes over the next few years. Are you aware of the impact this will have on insuring your assets? And are you across how the levy is assessed? Marvin Clough, Technical Director – Valuations, Business and Spatial Services, looks at the levy and what it means for industry.

There are only two certainties in life - death and taxes – and some would even argue taxes will only ever increase. And so is the case for the Fire and Emergency New Zealand levy (FENZ levy) which has increased by nearly 40% over the past 12 months, with more changes proposed between now and 2020. 

Since the introduction of the Fire and Emergency New Zealand Act 2017 (FENZ Act), the levy rate has increased from 7.6 cents to 10.6 cents per $100 insured, with many people unaware that clauses are gradually coming into place during a transition period.  Part 3 of the FENZ Act will be enforced from 1 July 2019. The levy provisions of the repealed Fire Service Act 1975 will continue to apply until the new regime takes effect. On 31 October 2018 a Bill was introduced to Parliament to extend the transitional levy rate for Fire and Emergency New Zealand to 1 July 2020.

While some believe the levy is an inefficient mechanism for funding, the aim of the changes is to simplify the funding process. Whatever your view, the resulting changes under the FENZ Act and transitional amendments will impact the levy paid by entities in the following ways:

• The levy will no longer just apply to contracts of fire insurance, but rather to contracts insuring property against physical loss or damage;
• The levy will be calculated on the 'amount insured' rather than the indemnity value of the property;
• Some Fire Service Act 1975 levy exemptions will be discontinued.

There are also several minor technical changes that will be introduced.

A different approach

So, what does this mean for industry? Post 1 July 2020, there will be no provision for use of indemnity value as a basis for assessing the levy. This means significant levy changes for non-residential property owners.  The existing Act allows for levies to be calculated on the indemnity value, based on the depreciated replacement cost approach. From my experience the indemnity value approach is typically 30% to 70% less than replacement cost (read “amount insured”). Therefore, levies increase because the amount insured is higher than the indemnity value. But it’s not simple.

The amount insured, for determining levies, may be the ‘sum insured’ in a contract, but only where the sum insured represents a fair and reasonable value in relation to the greatest value of insurance available over the term of the contract and the value of the insured property.

On the flip side, the non-residential rate is expected to be lower than the current rate of 10.6 cents per $100 of property. This means the total levy payable is going to vary for each policy holder, with some finding a large increase in total levy payable. 

Be prepared

You can see why Internal Affairs Minister, Tracey Martin, said “There are technical issues that need to be thought through and we want to have more information about what FENZ’s costs are before setting the new levy rates to fund it.” When the Bill was introduced, the minister also went on to say that levy payers will continue to pay the amounts they currently do until the introduction of the new levy regime from 1 July 2020. 

So, while there is an extension to the transitional period, it is important you are aware of all the assets you own.  This may seem obvious, but you would be surprised how many people are not fully aware of their assets! 

The new rules change how the levy is assessed. Which means it is more important than ever to have a comprehensive and up to date asset register and be familiar with the latest amounts for insurance. The exemptions from the levy also play an increasing role in minimising the amount of levy paid, so it is key to allow for this in any assessment completed for an insurance valuation certificate.

Of course, death and taxes aren’t the only sure things in life. Change too is inevitable. The FENZ levy has changed and will continue to change over the next two years. We recommend making sure you are prepared for this change to avoid any surprises.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.