The most comprehensive look into strata insurance undertaken in Australia – A data-driven holistic understanding of strata insurance – has been released.
Compiled by one of Australia’s leading strata researchers – Deakin University’s Dr Nicole Johnston, the report was commissioned by SCA.
SCA worked with its members, and formed a specially designed, representative taskforce to identify the report’s direction. It quickly emerged that driving a conversation based on statistics and data would best illuminate the work strata managers do and the strata insurance sector as a whole.
Some incredible information has been pulled together in the report that hasn’t been publicly available previously.
This article will provide a quick snapshot and explore some of the most important and insightful statistics and findings from the report and spend a little bit of time unpacking each one.
Owners corporations (OCs) paid more than $1bn for insurance in 2020, $830 million of which was premiums and $230 million in duties, levies, and taxes – from 2016 to 2020, the average annual total cost of insurance for OCs increased from $4,320 to $6,522.
The strata insurance industry is large and growing, and the mandatory nature of strata insurance amplifies the challenges faced to ensure mitigated risk and protection for consumers.
The full report has detailed state-by-state and territory breakdowns of premiums, duties taxes and levies and claims.
A very high 27.45% of premiums paid by Australian strata schemes are comprised of taxes, duties and levies. NSW pays this highest proportion, at 39.56% of premium value made up of taxes, duties, and levies.
Most concerningly for consumers, there are occasions where taxes are being charged on taxes, most notably where the GST is being paid on GST-applied services.
The most common causes of a claim or loss are water damage, storm damage, impact damage, burst water pipes and malicious damage; more than $1 billion of claims in Australia over the last five years can be attributed to water, storm and fire damage.
There are at least 38 pieces of legislation and associated regulations across Australia and New Zealand that regulate the strata insurance industry.
Strata insurance, and the strata industry generally, is complex. Strata insurance is impacted by general insurance, insurance contract laws, and federal state and territory legislation relating to duties, levies, and taxes.
Good strata managers have a solid working knowledge of the legislation that applies to strata insurance and use that knowledge to get the best outcomes for their owners corporation and indeed everyone living within the strata community they manage.
Fee structure for insurance is often bundled into an agreed services fee, with some strata management businesses offering fee-for-service models.
Where fees are bundled, they often include rebates, discounts and commissions from insurers or brokers, which subsidise the agreed services fee.
The strata manager value proposition in the insurance process has three ‘value pillars’.
The report identified that strata managers provide three main ‘value pillars’ in the strata insurance process:
- Strata managers carry out legal duties and are contractually obligated to act in the best interests of the OC.
- Strata managers are custodians of the OC records – a critical role as OC committee members change over time.
- Ongoing education and individual expertise means strata managers have a built up knowledge of relevant laws, regulation and how they apply to particular scheme.
There are 47 strata insurance services that are regularly provided by strata managers to their OC clients, and many are not well recognised or understood.
Strata managers undertake a huge number of tasks related to insurance and draw on their experience and most importantly, knowledge of the scheme and relationship with the members of the scheme.
- Organising and renewing strata insurance
- Paying insurance premiums on behalf of clients
- Providing documentation such as lot valuation to lot owners
- Lodging insurance claims and managing ongoing claims
- Record keeping and maintaining insurance records
- Providing general and specific advice on insurance matters
- Liaising with legal practitioners for non-property related insurance matters
One key findings was that strata management firms overall do not articulate the services they offer. Their value could be reflected better in management agreements and rectifying this would be one step to drive better understanding of strata manager value.
The strata insurance supply chain is complex, and each party provides value to the final product and outcome.
In most instances, the strata insurance supply chain at a minimum includes an insurer, an underwriter (specialising in strata), an insurance broker and a strata manager. Very often, a specialist valuer is engaged to properly assess the building’s value and reinsurers are also involved to ensure that the original insurer is adequately covered against major risks.
The supply chain is necessary, in large part, due to the complexity of strata insurance and the reliance on individual expertise to ensure an adequate product.
Aside from New Zealand and Tasmania, all jurisdictions have implemented laws requiring commissions received by strata managers to be disclosed to OCs or OC representatives.
Disclosure is absolutely critical to better understanding between OCs, consumers, regulators and the strata industry. Put simply, the more that consumers understand about what strata managers and those in the supply chain do in relation to their insurance, the better outcomes everyone will have.
NSW has mandatory disclosure arrangements and Queensland’s new changes to their body corporate legislation goes further than before. Positive steps are being taken and through understanding the full report findings the strata and insurance industries and strata communities have a blueprint for further collaboration.
Less than 40% of lot owners surveyed indicated that insurance commissions should be abolished. 30% sought improved regulation and 30% were unopposed to commissions based on their knowledge. The majority of lot owners opposed to commissions-based remuneration changed their position if it affected their agreed services fee by at least 25%.
Different forms of remuneration for undertaking the myriad insurance tasks listed above are used, with a commissions-based approach favoured by many strata management organisations.
To undertake insurance-related work, many strata management firms have indicated that they would need to increase their management fees if commissions were removed. Were this to happen, and management fees were increased, the majority of people surveyed indicated that would remove their opposition to commissions. This information is critical to conversations going forward that impact remuneration models.
Affordability and availability are particularly acute issues in Northern Australia
Before this report was published, we knew that since 2011, insurance premiums in northern Australia have increased by approximately 178 per cent, compared to 52 per cent elsewhere. This has led to a proliferation of chronic underinsurance or non-insurance among homeowners.
Again, this report has shone a light on the critical affordability and availability issues faced by northern Australia. The recent establishment of a government run reinsurance pool is welcome and SCA is working very closely with the Treasury in Canberra to ensure strata consumers get the best outcome from its design and funding.
What is happening next? What is SCA doing with the report?
In addition to promoting the report to our members and through our communications channels and the media, SCA has been holding and seeking meetings with government, regulators and important stakeholders within the insurance, property and strata industries.
The report is a first of its kind and SCA is using it as an education piece, to build understanding of the valuable role strata managers play, the strata industry broadly and strata insurance processes more specifically, and ultimately make recommendations on how to improve consumer outcomes related to disclosure, duties taxes and levies and industry remuneration models.
To access the Report, please visit www.strata.community/strata-insurance-reportwww.strata.community/strata-insurance-report