Victoria’s auditor-general has warned domestic building insurance claims are posing a risk to the state’s financial health.

Challenges in the WorkCover insurance scheme for injured workers are another threat, the independent auditor-general adds in its annual financial assessment for the state.

“There are several emerging risks likely to challenge the state’s ability to meet short-term financial targets, savings initiatives and manage its long-term sustainability,” the 2024-25 report says.

“Emerging risks in the general government sector are … financial sustainability pressures with domestic building insurance.

“These emerging risks are evident across the general government sector … highlighting the need for a holistic response.”

The report says that on June 30 the domestic building insurance portfolio had $205 million in assets and $695 million in estimated liabilities – a net shortfall of $490 million.

This deficit “grew over several years because of the sharp rise in builder insolvencies given industry challenges, which triggered a surge in insurance claims across the domestic building sector.

“Due to the $490 million shortfall … caused by adverse claims experience, the state contributed $590 million in capital to the Victorian Managed Insurance Authority ... VMIA then transferred the $590 million cash contribution, along with other assets and liabilities, to the Building and Plumbing Commission.”

The report says the Building and Plumbing Commission – a general government sector entity – would have incurred an estimated loss of $490 million at July 1 without the capital injection.

“Managing the domestic building insurance scheme as a general government sector entity may increase financial pressure on the government’s fiscal targets if adverse claims experience continues, where unplanned funding may be required to support Building and Plumbing Commission operations.”

The report says WorkCover reforms have taken effect but risks to the scheme’s sustainability remain.

WorkSafe Victoria, which manages the scheme, recorded an accumulated net deficit of $7.1 billion between 2018-19 and 2022-23, driven by adverse claims experience and continued premium deficit.

“There remains a risk that the reforms may not fully achieve the intended benefits to support WorkSafe Victoria’s long-term financial sustainability.

“Therefore, it is important that the government continues to monitor and evaluate the outcomes of these reforms.”