The New South Wales Government has recently released a discussion paper on changes to the way the emergency services are funded in the State. Fire and Rescue NSW, the NSW Rural Fire Service and the NSW State Emergency Service currently cost about $1billion a year to run. The current model sees contributions from the insurance industry, local government and the state government towards the funding of the three services. The insurance industry contributes to 73.7% of their total budget.

This state of affairs has been widely acknowledged as being inefficient, inequitable and counter-productive. Insurance taxes have been widely acknowledged to reduce rates of insurance. Un-insurance rates in NSW are some of the highest in the country. A move towards a property based level is strongly recommended in the discussion paper which is asking for community views on the design.

Most of the questions relate to how a fair and efficient property based tax can be levied. I wish to focus on a different aspect: If the current levy disincentivises risk management measures (ie. insurance) could the future levy be designed to incentivise risk management measures?

In theory the levy could be based on a service delivery model (which do exist for the various services). However any decision to do so would be primarily based on equity grounds – this does raise the tricky question of whether you would charge on the basis of the service provided (which are generally lower in rural areas) or the cost of providing the service (which are generally higher in rural areas).

The paper dismisses the use of a risk based approach to determine a property levy as impractical, but I think it deserves closer examination. How could a risk based approach work? Would it be feasible to implement? And would it actually lead to risk reduction?

Property risk comes from two sources – the site of the property (ie. its exposure to hazards) and its construction/use (ie. its vulnerability to hazards). For hazards like urban fire and hailstorm the site doesn’t matter too much. Other hazards, such as flood and bush fire depend on both building construction and location.

Exposure to hazards

The component of the risk attached to the site of the property is very difficult to move. It’s unclear what the effect of a site-based risk levy would be. On one hand, a higher levy could increase property prices and lead to more wealthy folk moving into the area. On the other hand higher rates for disaster prone properties combined with high insurance premiums, could just end up reducing the income and wealth of those who are disaster-prone, increasing their vulnerability.  Although there has been substantial research on the effect of flooding on property prices, there remains substantial methodological flaws in much of this research and more work still needs to be done. Changes to insurance costs are not a good indicator, if the prices get too high, consumers can just opt-out.  And council rates are generally based on property values, not the other way around, so they too make a poor guide of how individuals would respond.

What about the construction of the property? Here retrofitting, property maintenance, the installation of safety systems and other practices (particularly for commercial and industrial sites, which I will leave out in this discussion as they’re already highly regulated and only represent a small portion of the overall risk) could make a difference.

As the list of potential anthropogenic and natural hazards is rather long I’m going to concentrate on the major ones our emergency services respond to: urban fire, bush fire, hail and windstorm and flood.

Urban Fire

Around two-thirds of all residential fires in NSW (in 2006/07, the most recent year for which data is available) were caused by some form of human action, whether through negligence, misadventure or malice. Only 8.37% of fires were due to short circuits and other electrical failure, but this is the leading cause of fires due to equipment and design failures (which make up 15% of all residential fires).

These causes are reflected in the majority of home fire advice which relates to individual and family preparedness. Additional guidance is targeted at a few electrical items such as Halogen down-lights, but even this advice is heavily weighted to maintenance and inspection. Attempting to incentivise good behaviour through behaviour based discounts to a property levy would be virtually impossible to implement (at least without your house into some sort of AI surveillance machine to make sure you’re doing things right). With few structural and non-structural measures that can be implemented to reduce fire risk that leaves fire response equipment.

Smoke Alarms are already mandatory in NSW, so no additional incentive is needed to install them. However Fire and Rescue NSW does recommend the installation of Home Sprinkler Systems, which have been proven to be very effective at preventing deaths in house fires. Given that this is a very specific measure the best form of incentive may be some form of rebate on the installation of home sprinkler systems, rather than discounts to a property levy.

Bush Fire

As with urban fire much of the potential for mitigation of bush fire relates to maintenance and inspection. However design and construction are just as important. In NSW new dwellings and renovations must comply with Planning for Bush Fire Protection. However much of the risk is associated with existing dwellings in bush fire prone areas. There is the potential to retrofit existing dwellings using the construction methods outlined in this guide published by the Victorian Country Fire Authority. Some simple measures on existing dwellings such as installing steel screens on doors and windows, enclosing under-house spaces, fitting a rooftop sprinkler system and installing gutter guards are relatively cheap and practical for almost all dwellings.

As the methods vary depending on fire hazard and existing construction – a broad incentive could be effective in letting home-owners select their own retrofitting methods. A risk rating and scoring system for various mitigation measures could form modifications for a property based levy. The number of bush fire prone properties is only a fraction of the total building stock in NSW, a carefully targeted and capped levy ‘surcharge’ with reductions based on some sort of checklist of mitigation options might work – it needs further investigation.

Hail and Wind

Roof damage due to hail and windstorms (I’m going to ignore water ingress due to poorly maintained gutters and downpipes – another maintenance issue) is one of the major areas of response for the SES and a significant cause of property damage from natural disasters.

There are a variety of trade-offs when it comes to different roof types including cost, longevity, maintenance needs, damage potential and ease of repair. Corrogated Fibro is probably the worst roofing material due to its fragility and toxic nature. However I haven’t found any quantitative research on the costs and benefits associated with different roofing materials.

Roughly three quarters of all new dwellings are constructed with tiled roofs with sheet metal and slate making up the majority of the other quarter. Tiles and slate are the most vulnerable roofing materials to hail as shown in the following table:

Clearly sheet metal is the most hail resistant form of roofing, and if appropriately tied can be remarkably wind resistant too. Roofs are most likely to be replaced during renovations or at the end of the roof lifespan, or after damage. Although it’s unclear what the ‘best’ material is, incentives could encourage people to replace roofs (or build with a better roof in the first place) if a levy presents a clear cost disincentive when keeping the previous material. Gathering data by visual inspection or even remote sensing should be relatively affordable and not need to be repeated too often.

Flood

If a property is to be built or renovated in a flood prone area (noting that in some areas there can be a substantial difference between a 1% AEP flood, the usual residential building standard, and the probable maximum flood) there are a number of design and construction features that can substantially reduce flood damage. These include using flood compatible materials, installing the electrical wiring higher than normal and considering the use of ground floor rooms.

For existing dwellings some of these methods can also be employed, or there are other means including a variety of temporary flood protection products that can be retrofitted on existing buildings (usually designed to keep <1m of slow moving water out of the house).

The most expensive method is house raising. There are funding sources for the raising of houses in some jurisdictions, including NSW, however these are generally only in areas with approved programs. Anecdotally there is demand for funding for these projects outside of these areas. A levy reduction could help people pay for this type of project, however I’d argue that making funds available for any property that meets a particular criteria would be a more effective method.

Although there has been substantial work done on cost benefit of around flooding, I haven’t seen any work specifically relating to property based incentives/disincentives for these measures. As with bush fire and storm, plenty of potential for mitigation – but uncertainty if a property levy approach would work.

Conclusion

There is some work happening in building design and construction in relation to climate change, including looking at regulatory mechanisms to enhance mitigation and retrofitting and incentives. However more work is needed to better understand the risk, effectiveness of retrofitting measures and community response to incentives.

The Insurance Council of Australia commissioned Deloitte to investigate a number of models for a property based levy. It did propose a risk based model calculated on an LGA-wide basis with the risk measure based on previous fire incidence in that LGA. This would not create significant differences for individual properties to create incentives. It does recommend that additional research could be conducted, and models prepared to investigate a levy raised on a per-property basis.

With significant existing risk associated with natural disasters in Australia and new development increasing risk too, all possible measures to encourage property mitigation need to be examined. A risk-based emergency services levy with discounts for mitigation could be expensive and difficult to implement, and may not encourage enough mitigation to balance out the cost of the approach. However where this balance lies has not been established by research – I think it is worth further detailed investigation.