Vero’s Withdrawal From Home Indemnity Market Raises Concerns in Australia

The Australian government is reviewing options after Vero Insurance Co. Ltd. [83796] announced its planned withdrawal from the mandatory home indemnity insurance business in July.

Troy Buswell, the treasurer and minister for commerce, science and innovation, housing and works, said the government must take steps to protect home buyers and builders when a major insurer withdraws from the indemnity market. There is still time for considering a new arrangement for home indemnity, he added.

This month, Vero, a unit of Suncorp Metway Insurance Ltd. [77922], said it will withdraw from home indemnity business in all states after July.

Vero's move to exit the market was triggered by the New South Wales government's decision to underwrite builders' warranty insurance in the state.

"Vero has expressed interest to the New South Wales government in being a participant in the New South Wales scheme as an administrator and claims manager," said Vero in a statement.

The Brisbane-based insurer said it "has held discussions with various state governments, considered all alternatives and options, and has come to the conclusion that it has no choice but to withdraw from the national home warranty market."

This decision has raised doubts for home buyers, contractors and builders regarding future insurance protection. The national residential building sector would be impacted by Vero's move, said Wilhelm Harnisch, chief executive officer of the Master Builders Association in Australia.

The mandatory home indemnity insurance scheme was introduced in 1997. Vero has been offering home indemnity insurance since then, and the company's current market share of home warranty insurance is about 40%, said a Vero spokesperson.

As the largest underwriter for home indemnity insurance, Vero's withdrawal will create doubts about insurance capacity in the market. There may be loss of competition in the market in which the remaining operators may not have adequate capability to take demands, said Harnisch in an interview.

Home buyers and builders do not know how the home indemnity insurance market will fare after Vero withdraws, said Harnisch. All states will be affected by the pullout, particularly New South Wales and Victoria, which have the most building activity.

At the moment, Harnisch said there is "minimal" impact on product availability. However, substantial concerns remain about the uncertainty and long-term consequences in areas such as product underwriting, coverage and terms and distribution.

Vero said in a statement that existing policies for home warranty insurance "will remain valid for the relevant term," and the insurer's claims team will continue to process any claims received on all certificates issue up to and including June 30.

In Australia, home indemnity insurance is mandatory on all building works valued at more than A$20,000 (US$17,724) for protection of home buyers against defaulting builders and structural defects of new homes and renovations.

The government is now looking at options, including whether the state government would take over responsibility for home warranty insurance or abolish it.

There are two options: the Tasmanian model with no compulsory insurance regime, and the New South Wales model with government running the regime, said Buswell.

"We'll be in a position to make an announcement about that well ahead of it having any impact whatsoever on the building and construction sector," he said.

"Vero is working collaboratively with relevant government and all stakeholders to ensure a smooth and timely transition out of the builder's warranty insurance market," said Vero.

Harnisch said the government is working with the industry to come up with an appropriate transition and products. The industry has divided views on which way to go, and Harnisch noted it's not easy to find a solution.

Some states intend to take home indemnity to be running by the government. But there are questions as to who is going to underwrite the policies, how the products will be delivered and what is to be covered, said Harnisch. He added that one thing is certain: the whole dynamic of the market will change.

In the long term, Harnisch said there are also concerns about viability and the cost of revised insurance products.

(By Iris Lai, Hong Kong bureau manager: [email protected])