What’s happening in the insurance market right now?

Insurance premiums for your strata plan putting the pressure on? Seeing increases of 20% or more per annum? Wondering why you are only able to get one renewal quote each year?

There is no doubt that the placement of insurances for strata schemes has been getting progressively more difficult over the last few years, and those challenges have been exacerbated by broader economic issues affecting Australia and the world as a whole.

So where are these problems coming from, and what can strata schemes do to manage this issue?

And of course, let’s start with the necessary disclaimer. Insurances are a financial services product. Strata Sense is not a financial adviser and this is not intended as financial advice, either general or specific. It is based upon our observations of what has been occurring in schemes across our portfolio, which based on discussions with brokers and prospective clients appears to be occurring in other buildings as well. If you would like to hear more about what is happening for your scheme specifically, please reach out to your strata manager to arrange a discussion with your insurance broker.

This article is aimed at helping members of the strata committee, who are most likely to be involved in working with your strata manager on the placement of insurances.  If you’re an owner in a scheme but you’re not on the committee and you want to know what is being done to address this important matter, get in touch with your strata manager and they’ll be able to help

To take a step back, strata schemes in New South Wales are required by law to take out a series of insurance coverages (as well as potentially taking on some optional additional coverages). This is a mandatory requirement that can only be avoided with a Tribunal order. On top of this, strata schemes in buildings with BMCs have additional requirements (this article will just focus on strata plans, but if your building is part of a BMC, feel free to get in touch).

Given that the strata policies that the NSW strata schemes need to take out must comply with the NSW legislation, strata plans are effectively faced with a couple of different options. Firstly, they can go to a strata insurer that practices in NSW that has a policy available that directly mirrors the legislative requirements of the state. Secondly, they can go to an insurer that doesn’t usually work in the space and ask them to “build” a custom policy. Thirdly, the building can go to one of those other (possibly international) insurers and get coverage that mostly covers the legislative requirements and then fill the gaps with a local insurer. In practice, that last option would mean getting a building policy from overseas and then getting a policy for things like office bearers’ liability from a local insurer.

Asking an overseas insurer to build a policy that matches NSW legislation is just not realistic. That insurer would need to get lawyers involved specialising in NSW strata law and insurances to help build a policy just for the one potential client. It’s not likely to happen and, if the scheme could find an insurer who was prepared to do it, they would likely charge a huge fee for the pleasure.

That leaves the options as working with a local insurer for the whole policy or going with a few policies from different sources.

If available, in our experience, quotes from strata insurers who practice in the NSW strata space have been by far the more commercial of the different options. Going with a “mixed” policy in our experience has been the option of last resort when the strata insurance market gives no relief, and it can cost an extraordinary amount.

Herein lies the first challenge for strata schemes in New South Wales, and it’s a challenge that has gotten worse with time.

For starters, there are not many insurers working in the NSW strata space to begin with. Having so few possible insurers doesn’t make for great market competition.

And then on top of this, not all of these insurers want to deal with all kinds of buildings. Some will just decline to quote on buildings over a certain size or with flammable cladding. If that means that a large scheme only has two or three insurers who want to quote on buildings, then that building is not going to have a lot of bargaining now.

Enter problem number 2. We as a society are in difficult financial times. There just isn’t as much willingness from investors to put money on the line in insurances. Insurance premiums in everything are therefore liable to be increasing.

And this leads us to problem number 3. Not only are insurers not willing to cover as much risk, but they are also generally looking to withdraw from covering buildings. This relates to a loss of confidence in large buildings generally (think back to issues like Grenfell Tower and Mascot Towers as to where this loss of confidence comes from) And unfortunately, every time that there is an issue with another building collapse or cladding fire (even in other countries), insurers are less willing to allocate their insurance capacity to buildings.

In short, there are very few insurers in the strata market, going outside that market is very expensive, those insurers are writing less policies in total, and what policies they are writing they would rather allocate to anything other than building policies unless they can charge a large enough premium to make it worth the risk.

Add to these the large number of taxes and levies charged by the government on insurance policies (introduced in years gone by but calculated based on each year’s premiums) and unfortunately a strata scheme looking at their premium now might find it two or three times what they were paying a decade ago.

So what can schemes do about it?

Firstly, strata schemes should be discerning with the insurance broker they use and should speak with them policy early in the renewal cycle. There are a range of insurance brokers in the market and their quality can vary. The decision as to which broker a strata scheme uses should be one that should be determined by their ability to get a result, and strata committees have a right to have a say in that matter. When considering your broker, consider meeting with them directly to ensure that the strata scheme is emphasising their ability to deliver rather than fee. It’s no good going for a broker who charges a few thousand dollars less in brokerage if the switch leads to the base premium going up by $10k because that broker is not accustomed to working in the strata space.

Secondly, consider looking at how the strata scheme remunerates the strata manager to move away from a model based on them receiving insurance commissions. No, this isn’t just us saying that all strata plans should sign with Strata Sense (we rebate insurance commissions)! Although the majority of the industry is based around receipting and retaining insurance commissions, strata schemes can always ask their manager at renewal to move to a higher base fee with commissions rebated. Bear in mind that commissions are often calculated based on a percentage of the insurance premium. If a premium goes up by 30%, then the insurance commission received by the strata manager could also go up by 30%, which for larger schemes could be many thousands of dollars (and certainly more than an annual CPI increase on base management fees).

Thirdly, strata schemes should get proactive about preventative maintenance and avoid small claims. In our observation, insurers are skittish around schemes with unrectified defects and a bad claims history. An incumbent insurer might offer renewal terms, but if the other insurers are all scared off by unrectified defects (which will need to be disclosed at renewal time) then that scheme will have no leverage to try to negotiate a better premium (or at least try to stave off a big increase).

Fourthly, strata schemes start talking to your broker and strata manager about their next insurance renewal early (better yet, now!). At Strata Sense for smaller schemes we will start renewal discussions months in advance. Although the insurers won’t issue renewal terms until quite close to renewal, you can do a lot to help your broker to position your scheme to the insurers with the benefit of time. If your strata manager discloses a defect six months out from renewal to the broker and the broker raises that that defect will be a major concern to the insurers, you can do a lot to fix that defect (or at least get the process started) in that six months. If that only gets disclosed a month out from renewal, then you are going to be hard pressed to even get quotes to fix it, let alone get it fixed. You can’t control, and nor can your strata manager or broker, the premiums that the insurers will offer, but you can equip your broker with the best information possible to try for a positive result.

Finally, despite all of the above, set expectations on insurance premiums appropriately, and if your premiums go far above your budget, consider issuing communications to your non-committee member owners about that as soon as possible so that they don’t have a shock when it comes to the AGM. Insurance premiums are now in many cases the most expensive annual costs for strata schemes, and premiums going up by double digits can lead to large levy increases. It might be that, even with the most robust approach possible, you are faced with a large insurance premium increase. Following a comprehensive process to that point and then communicating with owners about the issue proactively will assist owners in understanding what is happening with their most important investment and ensure that the focus remains on a well maintained building at all times.

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