HBCF Eligibility Review – Dec 2021
HBCF Eligibility Review – Dec 2021
icare is currently conducting the most comprehensive review of HBCF eligibility since 2016 and is considering significant changes for early 2022.
The iCARE review was prompted by recommendations of the 2020 Independent Pricing and Regulatory Tribunal (IPART) report and recommendations of the icare Customer Advocate on behalf of builder customers.
The objectives of the review include maximising fairness, simplification, and to speed-up the process.
icare has provided preliminary information on their review, more details will be provided in the coming weeks. The information provided by icare is summarised below.
In June 2021, 20,475 businesses held eligibility with HBCF.
89.08% of businesses with eligibility are system-reviewed builders i.e., reviewed approximately every 3 years.
HBCF used data from businesses that purchased an HBC policy between August 2014 and March 2018 to test 14 different eligibility methodologies. The purpose of the tests was to determine the best model for assessing future financial strength of system reviewed and small builders.
The review determined that the current procedures that apply for businesses that turnover more than $5m seem to be the best for predicting future negative financial outcomes.
The assessment outcomes were very different for smaller and system-reviewed businesses. It was concluded that a ‘composite commercial credit score’ is the best predictor of future financial difficulties for this cohort.
icare's findings are that a credit score system is simple, efficient, less onerous, and less expensive for builder customers. In a system that has historically been underfunded due to exceedingly high claims costs, these aspects of the model were viewed favourably.
New Eligibility System
System reviewed and small builders will be reclassified as either Group 1 or Group 2.
Group 1 builders seeking an eligibility limit of less than $3m in Open Job Value (OJV) would be offered an automated eligibility limit of $1m, $2m, or $3m based on their eligibility score.
Open job Numbers (OJN) will be changed to ‘unlimited’, allowing Group 1 builders to have any number of jobs in progress.
New entrants to the construction industry will not be granted over $1m in eligibility until they have completed the Building Contract Review Program (BCRP).
Group 2 Builders seeking an eligibility limit of between $3m and $5m in OJV will be offered automated eligibility of $3m, $4m, or $5m. Builders who do not utilise $3m+ across 3 years will be moved to Group 1.
icare believe the simplified assessment is appropriate for most builders; below are some triggers for manual underwriting reviews:
- Contractors seeking to do multi-unit work over $1m in either Group 1 or 2, reflecting the highest risk builder group
- “Common directorship” situations, where complex commercial structures and group entities require greater clarity
- High-Risk builders, which are expected to comprise 2% of Group 1 and 8% of Group 2 builders
- Builders seeking to transition from Group 1 to Group 2 for the first time
The table below captures the information required to inform the assessment tool that calculates a credit score for a builder. Responses to the business characteristics on the left-hand column of the table will be collated into a score out of 500.
icare anticipate the new system will be quicker and easier to administer, be more transparent, and more predictable for builders which is a substantial enhancement to the current system. It is interesting to note that a Profit & Loss or Balance Sheet is not required.
While there are positives, there is always greater rigidity in a system that is more formularised around business characteristics and less bottom-line dollars.
The system does not allow a quick injection of capital to the business to enable a builder to accept a project significantly larger than its normal size.
icare modelling predicts approximately 79% of builders will have their utilised open job value increased or maintained at the current level under the new system. 21% of builders may expect their utilised open job value to decrease or require manual review.
icare HBCF plans to submit their new proposed system to the State Insurance Regulatory Authority (SIRA) in January 2022.
If icare's proposal is accepted by SIRA, changes will be introduced to Distributors in February/March 2022.
The new system may ultimately go live in April 2022.
To review the current guidelines for eligibility, you can access them here on myBIG, the Building Information Gateway.