General insurers say they should not be forced to help pay for an almost $50 million funding shortfall in the Compensation Scheme of Last Resort.

The industry-funded CSLR was launched last year to pay compensation to claimants when an eligible Australian Financial Complaints Authority ruling remains unpaid, often because the business involved has gone bust. However, general insurance complaints were not included in the scheme.

The CSLR says it needs about $75.69 million for 2025-26, and $67.28 million of this is attributed to the financial advice subsector. However, the rules state a maximum of $20 million can be collected from a subsector, leaving a $47.28 million shortfall.

Federal Treasury is now consulting on how to proceed, with one option being a broad “special levy” to spread the financial burden.

In a submission, the Insurance Council of Australia argues strongly against such a move.

It says the CSLR excludes general insurance complaints in recognition of the sector’s strong regulation, and cross-subsidisation “essentially requires companies that meet expected ethical and prudential standards to underwrite those that do not”.

“The Insurance Council submits that the general insurance sector should not be called upon to meet funding shortfalls,” the submission says.

“Given any funding contribution by general insurers will ultimately come from premiums paid by consumers for general insurance products, it is unfair for these consumers to be asked to fund a compensation scheme to which they have no access.”

ICA says it fears the funding shortfall indicates “broader scheme sustainability issues” and “a fulsome review of the scheme’s overall settings” is required.

“The CSLR’s built-in mechanism for cross-subsidisation (the ministerial special levy) has previously been described as necessary to ensure appropriate compensation for ‘black swan’ events,” ICA says.

“However, it is inappropriate to describe these events as ‘black swans’. Far from being rare and unpredictable events, collapses of non-prudentially regulated financial services firms occur on an unfortunately regular basis.”

ICA adds “careful consideration” should be given to the impact of any special levy on insurance affordability.

“Increasing the cross-subsidisation of the scheme by imposing a special levy on the insurance sector is likely to have the effect of increasing cost pressures across general insurance businesses, thereby putting further upward pressure on premiums.

“In the current economic environment where significant effort is being put into reducing cost pressures on general insurance premiums, it would be counterproductive to add additional costs into the system.”

See ICA’s submission here.