For decades, levies on insurance premiums have funded New Zealand’s Fire and Emergency service (FENZ), with 95% of the organisation’s funding paid for by insurance buyers in the year to June 2023.
While the insurance sector has delivered millions to the firefighting and emergency services, further demands from FENZ are set to place significant strain on insurance buyers and the insurance market. From July, the levy on vehicle, house and other property insurance is set to rise by 12.8%, with another round of significant changes planned in two years.
Legislative changes are set to push the levy even higher from 2026. New levy provisions in Part 3 of the Fire and Emergency New Zealand Act 2017 will also widen the net for insurance levies, causing significant concerns about insurance affordability and foreseeable issues for the market.
FENZ demands
From 2026, FENZ is proposing to increase the overall levy by a further 5.2% on top of this year’s near 13% hike in order to cover its costs.
FENZ claims the extra funding is needed due to a rise in natural catastrophe incidents, but it has already seen levy revenue rise from $392 million in the year to June 2017 to $673 million last year.
The insurance industry and insurance buyers contributed most of that amount, with the Crown only supplying $10 million a year in direct FENZ funding.
Critics including former Insurance Council of New Zealand CEO Tim Grafton, believe the levy model places too great a burden on insurance buyers, giving the uninsured a free ride.
FENZ’s latest levy increase plans have drawn scrutiny from coalition government ministers in recent months.
In April, ACT MP and Internal Affairs Minister Brooke Van Velden said she was “not yet convinced that such a [levy] increase is justified in 2026."
Van Velden has asked FENZ to look for cost savings to keep levies affordable for consumers. The minister said she would assess funding alternatives to ease the burden on levy payers.
Van Velden added: “I also consider it important that FENZ demonstrates a high level of accountability. I also acknowledge that it is levy payers – individuals, households and businesses – who will pay for any increase,” the Minister added.
FENZ has been asked to provide evidence of its need for a further 5.2% hike from 2026, given the “already substantial 12.8% increase” from this year.
The fire and emergency service has also been told to outline the key outcomes the extra money would deliver, and analyse lower levy rate options.
The organisation says more money is needed as it deals with a wider range of emergency risks.
A FENZ spokesperson said: “The range of activities we are now responsible for is significantly broader and more complex than any of our precursor organisations, and the new approach to levy rates is intended to help address this change.
“The options outlined in our discussion document are only proposals at this stage,” FENZ added.
Motor and property levy changes
Following July’s increases, the next round of levy rate hikes will take place between 2026 and 2029.
Car insurance will be hit with a significant levy increase. The levy on full-cover motor insurance will rise from $9.53 later this year to $40.12 per vehicle by 2029.
“This is going to create insurance affordability issues for domestic personal lines covers and commercial fleets,” says Duane Duggan, head of legal at Gallagher. “A four-fold increase will have a major impact.”
The levy on residential property insurance will also be readjusted. A levy of 11.95 cents per $100, capped at $100,000 per property will be lowered to a 1.85 cent levy on every $100 insured, up to a maximum sum insured of $625,000.
Duggan says this will be “very complex for brokers and insurers to administer.
“Calculating levies will become quite complex, especially for mixed-use buildings,” he adds.
Major changes are also planned in the commercial property space, with owners of older commercial properties set to be hit with significant insurance levy increases.
The non-residential property insurance levy of 11.95 cents per $100, uncapped, will change to 11.51 cents per $100 insured, uncapped. Crucially, the levy will be charged against the total sum insured rather than the indemnity value.
Historically, the commercial property insurance levy has been charged against the (depreciating) indemnity value of a building. However, from 2026 insurance buyers will need to pay a levy against the total sum insured, leading to much higher rates.
This will be a major challenge for owners of older properties with a large difference between the indemnity value and total sum insured.
IBANZ chief executive Mel Gorham says charging commercial property insurance levies against the total sum insured will lead to huge increases for owners of older properties.
IBANZ has conducted a review of 17 commercial property owners across a variety of business types. In 2023, their collective levy total was $1.6 million, which increases to $1.8 million after July this year and then almost doubles to $3.4 million when applying the rate to the sum insured from July 2026. These totals assume that the value of the properties remain static over that period, which will not be the case.
“GST is then added to the levies so in all, an eye-watering average increase that few will be able to bear," Gorham says. “This average is clearly well in excess of the 5.2% proposed increase FENZ is looking for.
“There are a significant number of buildings around the country which will have an indemnity value far lower than the sum insured," Gorham says.
"Because of age or condition, it is not uncommon for indemnity values to be 25% of the sum insured, particularly on rural properties. The increase in levies payable on these will be crippling for many."
Duggan says: “For owners of older buildings, indemnity value can be a third of the total sum insured, so people will face significant cost increases. The FENZ consultation document was totally silent on that; they have dismissed the potential impact on the market out of hand.
“I think their assumptions are wrong, which will lead to large over-collection of the levy and unaffordability of insurance,” he adds.
Gorham believes the levy increases will affect consumer behaviour.
"Clients often perceive levy increases as increased insurance costs because the insurance industry invoices and collects the levies on behalf FENZ.
“That said, IBANZ members are seeing clients cancel or reduce covers as they manage the effects of the prolonged, higher inflation rate, cost of living rises and increased insurance costs."
Exemptions scrapped
The new levy model casts its net far wider than the current system, with several levy exemptions set to be scrapped.
Insurance on vehicles such as boats and planes will be captured by the updated levy. Insurance on retaining walls, swimming pools, water tanks, water towers, and livestock, growing crops, silage and hay will also lose their exempt status.
A far wider pool of insurance buyers will have to pay the charge.
“Everyone with a pleasure craft down at the marina will be paying a levy,” says Duggan. “Likewise for helicopters.”
Gorham believes the exemption changes are unjustified.
“You have to question the rationale behind the long list of previously exempt property types that will no longer be exempt," Gorham adds. "We think it would be very difficult for FENZ to point to what support would be provided to boats tethered to sea moorings, for example."
Consultation
The changes to the FENZ levy were put out to a consultation, which ended in May.
Industry bodies, including IBANZ and the Insurance Council of New Zealand (ICNZ), have had an opportunity to voice their concerns.
ICNZ’s recently appointed chief executive Kris Faafoi said he was keen to discuss the matter with FENZ.
“Given wider concerns about the challenges around the affordability of insurance, in some instances the proposed changes in levies will have to be passed on to insurance customers through their premiums,” Faafoi said.
“We have yet to meet with FENZ about their proposals and ensure the proposals are appropriate. We have in the past expressed our concerns about the ongoing sustainability of FENZ funding,” Faafoi added.
“Like all New Zealanders, we want FENZ to have the appropriate resources, but we also want to ensure that the funding via premiums is sustainable, given that any increase in levy will mean our customers will pay more via their premiums.”
The changes would come into effect in July 2026. IBANZ has called for a two-year lead time to adjust to the new
levy model.
“The industry has significant work ahead to ready computer systems for the extensive changes that are preferred by FENZ if they come into force," Gorham says. "There will be a lot involved in understanding the complexities and we have signalled a long lead-in time is necessary to enable change and educate teams so they can properly inform their clients," Gorham says.
Duggan believes the raft of changes will lead to higher back-office costs at underwriter and broker level, which will be passed on to consumers.
“Ultimately, this will also be reflected in insurance premiums. Insurers will have to change their systems and their businesses to capture this new information. This will involve substantial time and cost, so that cost will have to be passed on.”
Outlook
While the coalition government has asked FENZ to justify its levy increases, the insurance industry fears unintended consequences from the new model are being overlooked.
“Decisions about property that would no longer be exempt were recently made by Cabinet. We are concerned that the implications of these changes on insurance decisions may not be fully understood. We also question what risk of requiring FENZ to support much of the no longer exempt property types present, and how FENZ could assist given the isolation and access challenges that many of them have."
She adds: “As we worked through the consultation document and Cost Recovery Impact Statement, we
became aware of a number of errors and assumptions in both that we believe are misleading and undermine the consultation process."
Gorham believes the level of misunderstanding FENZ has reached on the impact of the move from indemnity to sums insured for commercial buildings does not meet the requirements that the levy is equitable and universal. They will lead to a less fair system for those who shoulder most of the levy cost and amplify the already accepted issue of FENZ costs not being shared among all who could benefit from FENZ services.
“The increases for commercial property, no longer exempted property, all domestic motor and commercial third party motor are so significant it is foreseeable they could lead to decisions to not insure or not adequately insure assets, materially reducing the levy revenue,” Gorham says.
“Like all New Zealanders, IBANZ and our members support FENZ having the appropriate resources to ensure they can deliver their vital services and support when we need it.
"IBANZ has submitted an extensive response to the consultation reiterating our previous advice and discussions with FENZ, Internal Affairs and Ministers. We will continue to work on behalf of clients and the industry to be heard.”
