This article is about strata insurance increases and the compounding effect in 2023.
Premiums are still on the rise
When there is an annual ‘double digit’ increase in both the Building Sum Insured (BSI) and the Premium Rate per Million (PRM), say by 10% and 15% respectively, the premium increase can be quite alarming. For example, if you paid a premium of $36,000 to cover a $40M building in 2021, you will pay about $9,500 more in 2022 ie an increase of 26.5%.
We have been advised by industry professionals that we should budget for similar increases in 2023 ie about 10% for the BSI and 15% for the PRM.
These consecutive annual increases in the BSI and the PRM will have a compounding effect of 60% over the 2 years. For example, if you paid a premium of $36,000 for a $40M building in 2021, you should be budgeting for a $57,600 premium for a $48.4M building in 2023. There are many ways to ‘slice and dice’ the numbers, but a premium increase of $9,500 in 2022 plus another increase of $12,100 in 2023 means an overall increase of $21,600 in just 2 years.
Excesses are also on the rise
We saw a lot of schemes hit with increases in their excesses in 2022, largely attributable to their claims history – especially re water damage. Because so many schemes had suffered water ingress from extreme weather events in 2021, a $10,000 Excess was threatening as the new norm for water damage claims.
Well, a new minimum excess for all claims is emerging across the whole market. The independent insurance broker Tyrone Shandiman of Strata Insurance Solutions advises that the leading strata insurer CHU/Flex has a new $2,000 standard excess for BSI over $2M, and a new $5,000 standard excess for BSI over $50M. These changes were effective from January 2023.
Two other insurers, Longitude and Axis, have increased their standard excess to $2,000 – effective March 1 2023.
And where these insurers lead, do not be surprised when the rest of the market (all strata insurers) follows.
Commissions? Well, let’s not forget they also are increasing
Most owners would be aware that the insurer’s pay a minimum commission of 20% to brokers and their ‘authorised representatives’ – including many body corporate managers (BCM).
Many owners are concerned about these commissions – to the point that serious questions are being asked at influential levels about this practice and variations on it. For example, some BCMs include a clause in their contract that if you by-pass them and go directly to an independent insurance broker, the BCM is still entitled to the (foregone) commission ie, a fee for non-service. This didn’t wash too well in the Hayne Royal Commission into Banking Misconduct a few years ago, and it – and its siblings – may not survive scrutiny in our industry either.
In the meantime, the substantial increases in premiums are proving a major windfall to anyone who receives the 20% commission.
Whenever anyone mentions percentages, it is always useful to ask ‘Percentage of what?’ And as the ‘what’ rises, so too does the dollar-value of the commission.
We are seeing premiums going up by at least 60% over the last 2 years, and the dollar-value of the 20% commissions has naturally followed in their wake.
We can understand why the premiums are rising, because of increased building costs and increased risks to the insurers – largely through no fault of the building industry or the insurers.
It remains difficult to see how the operating costs of the middlemen – the brokers, their authorised representatives, and the BCMs – have also gone up at the same rate ie by 60%.
There is some relief available, however, if you talk to the right people.
Discounted premiums
Some independent brokers are alive to the inequity of commission creep. There is one broker who rebates at least 25% of the 20% commission back to the client, regardless of the size of the premium.
Brokers may also be alive to the principles of ‘economies of scale’. For schemes with a BSI exceeding $50M, they may rebate up to 50% of the commission back to the scheme. We are talking real $$$s here.
These approaches mean a ‘win-win’ for all.
Conclusion
Effective body corporate management is an on-going, relentlessly challenging exercise to get best value for money through good governance processes within the ambit of the law. When you get one problem sorted, another pops up… and another.
Strata insurance is one of the big risk areas, and its effective cost is going through the roof.
The building replacement costs, the premiums rates, the excesses… all are on the rise. Even the commissions are effectively rising at an artificial and inflated rate not directly linked to any increase in the brokers’ actual operational costs.
Some things we have no control over. But there are things which an active and informed body corporate can do to manage these insurance costs, and possibly the first step is to engage the whole community in a discussion about what the community is facing and what they think can be done to help keep costs to a minimum.
In the meantime, ….
- Make sure that your BSI accurately reflects the true replacement cost.
- Ensure your broker goes out to all insurers, and not just the favoured few.
- Closely manage any claims, avoiding the small ones just above the excess which irritate the brokers and insurers.
- Share this information with all of your community. They have a right to know.
Ross Anderson
Active QLD Lot Owner
This post appears in Strata News #642.
Have a question or something to add to the article? Leave a comment below.
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This article has been republished with permission from the author and first appeared on the UOAQ website.
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Is the Strata Manager allowed to find the highest commission Insurance company for he’s benefit or is he there to protect us and find the best deal for the owners…..
Hi Lesley
Thanks for this question. We have spoken on this topic quite a bit. You can take a look at these articles/videos for our most recent contributions:
NAT: Strata Insurance Commission in Australia: Is transparency enough?
NAT: Advocating for Change Against Unfair Practices
Ross you are spot on with your comments the SM industry have only one interest and that is to gouge out of unsuspecting Lot Owners every cent they can.Regrettably the majority of Owners do not realise the SM in first place receive commissions and the smug attitude of these entities needs to be sorted.For doing nothing they obtain a sum way out of proportion to what they do.It is a great little oops huge earner for them in todays environment.
I am a Lot Owner who fights a losing battle with these “ alleged” SM’s but they have it all over Council Members who volunteer but are easily conned by some people who have a way with words.
Owner Apathy is an issue this is where action needs to start so the Lot Owners fairly treated and not screwed.I am over in the West unfortunately we have not had the climate impact that has hit the East Coast but we caught up in the cycle of possibly limited claims but facing substantial increases in premium and excesses and the worst part is SM’s raking in the income at our expense. We must keep going will be a hard battle .
John…hi.
First of all, thanks for the feedback.
Second… I have no doubt your concerns about the strata managers (SM) being also the ‘broker’ echo a very common theme amongst informed owners from coast to coast. I personally have a legal opinion from a Senior Partner of a national law firm, advising there is a clear conflict of interest in this relationship, ie between SM and Authorized Representative of the insurer/broker. But do you really need a lawyer to tell you the difference between right and silly.
Further, we often see members of the strata industry rationalising this relationship on the basis that many SMs would go broke without their insurance commissions. This is really a sad indictment of the business model for those SMs who obviously have to under-quote to get the SM job in the first place.
There already are many problems in the strata insurance industry, without injecting an improper relationship into the mix.
My advice is always… separate the functions of SM -v- ‘broker’; consult an independent broker; test this broker every 3 years or so (making them compete keeps them competitive); and check that your broker is truly independent and not linked to corporate entities with holdings in other branches of the industry, eg insurers, or SMs.
Regards
Ross
So in FNQ a building valued at around $40Million pay over 100K for insurance now.. It would be good if you could break up Qld insurance premium information for those who live above and below the Tropic of Capricorn as the news on insurance premiums charges, and exclusions are different..
Mary
At this stage, I do not have access to detailed figures on the NORTH -v- SOUTH comparisons, but am aware that a group of concerned owners in FNQ have been collecting a lot of information about strata insurance north of the Tropic of Capricorn. They soon will be making this available to the Unit Owners Association of Queensland (UOAQ) for their members’ use.
What I can say is this:
1: Cost of construction in FNQ is at least 10% higher than in S-E Queensland. So, if you take a $60M building sitting on the banks of the Maroochy River and plonk it down on the Strand in Townsville, you are looking at a $66M ‘Building Sum Insured’ up there. This obviously pushes the premium up. (The % rate of annual increase may be around the same across the state, but the base figure is that much higher in FNQ.)
2: The Premium Rate per Million (PRM) in FNQ is at least double what it is down here… and this is confirmed in the example you’ve given ie $100K for a $40M BSI means your PRM is $2,500.
The same building down here would be worth around $36M with a PRM around $1,000, meaning a premium of $36K. There is a BIG difference from the $100K premium you are paying, for essentially the same building.
And think about the inflated effect on the $$ value of the 20% commission, ie $20K in FNQ -v- $7.2K in SEQ. Someone is getting done over for a whole lot of $$s, unless you can convince your broker to pass some of the commission back to the client. Better still, go to the broker who hands on – as a matter of routine – half of the 20% commission if the BSI is over $50M, and at least one quarter of the 20% for all other clients. Remember…making them compete makes them competitive.