Insurers have pressed for a rethink on their share of the $170.3 million special levy to cover a cost blowout in the Compensation Scheme of Last Resort, questioning the metrics used to decide contributions.

Insurance product providers are in line to contribute $12.97 million and insurance product distributors another $1.44 million under the proposed three-tier “waterfall” funding model, according to a Treasury consultation paper.

They are grouped in tier 3, comprising retail-facing subsectors – including claims handling services providers – that insurers say are “unrelated” to the scheme’s FY27 funding gap.

Tier 1 contributors are associated with the scheme’s losses and tier 2 is for those deemed “sufficiently connected” to the cost blowout.

The Insurance Council of Australia says it is concerned about the use of Australian Securities and Investments Commission industry funding model metrics to allocate a tier 3 levy to insurance subsectors.

“As outlined [previously], using total premium income as a levy metric for insurance product providers can capture commercial as well as retail insurance activity,” the council says in a submission to Treasury.

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“This raises questions about the consistency of the allocation with the policy rationale for tier 3, which is described as applying to retail-facing financial services subsectors.

“Similarly, the claims handling metric can produce highly concentrated outcomes because claims volumes can vary significantly between insurance products and business models.”

ICA urges Treasury to reconsider its approach, noting it has made a change to address a similar issue with tier 3 large securities and futures exchange levy contributors, where the metric can inadvertently capture wholesale and institutional activity.

“The Insurance Council considers that the same principle should apply where insurance metrics capture activity outside the intended retail focus of tier 3,” the submission says.

Insurers have also repeated a call for “lasting reform” of the scheme, which is a last resort for consumers with unpaid Australian Financial Complaints Authority compensation awards, excluding general and life insurance.

“Our position is that funding arrangements should reinforce accountability by aligning costs as closely as practicable with the sectors and activities responsible for, connected to or benefiting from the conduct that caused consumer losses,” the ICA submission says.

“The scale of the current special levy reinforces this.”