Haris Ashley
Strata insurance rates in Australia have been surging in recent years, with increases ranging from 15% to 20% on average across the country. Some premiums are increasing by as much as 35%, and the market is expected to remain challenging in the foreseeable future. There are several factors contributing to this rise, including the financial relationships between strata managers and insurance brokers, increasing reinsurance costs, rising loss ratios, and frequent claims due to severe weather events and natural catastrophes. These catastrophes have also contributed to the ESL rate increase across residential and commercial strata properties. Additionally, changes in underwriting guidelines and the familiar inflation challenge are playing a role in the rising strata insurance premiums.
| Characteristics | Values |
|---|---|
| Date | 2023 |
| Location | Australia |
| Average increase in insurance rates | 15% to 20% |
| Highest increase in insurance rates | 35% |
| Reason for increase | Natural catastrophes, inflation, increased costs of building materials, changes in underwriting guidelines, and increased reinsurance costs |
| Other reasons | Commission payouts to strata managers and insurance brokers, and conflicts of interest |
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What You'll Learn
Natural disasters and severe weather events
The impact of natural disasters on the profitability of insurance companies is significant. According to Honan's strata expert, Teighan Carr, the burden of natural catastrophes falls heavily on the small number of underwriting agencies providing strata insurance. As a result, the profitability of these companies starts to decline, leading to rate increases. Additionally, insurers are now taking into account weather-prone exposures when determining premiums, which contributes to the overall rise in strata insurance rates.
The relationship between strata managers and insurance brokers has also played a role in the increasing strata insurance rates. Commissions and broker fees, often unknown to strata owners and owners' corporations, can influence the premiums paid. The strata manager, acting as an agent for both the broker and the owners' corporation, may not always prioritize the interests of the owners. This conflict of interest can result in higher premiums for strata owners.
Furthermore, changes in underwriting guidelines and the increased frequency of claims have led to properties being categorized as "high risk." Insurers are applying special policy conditions and exclusions to these properties, including higher excesses and cover limitations. The presence of certain materials, such as lightweight construction materials, can also impact a property's risk classification. As a result, properties deemed "high risk" may experience even higher strata insurance rates.
To manage the impact of natural disasters and severe weather events on strata insurance rates, insurers are adjusting their underwriting guidelines and increasing rates and excesses to cover costs. While these measures are necessary to protect the financial health of insurance companies, they contribute to the overall rise in strata insurance premiums. Strata committees, lot owners, and body corporate managers are advised to budget for premium increases and seek expert advice to navigate the challenging market conditions.
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Inflation and rising construction costs
Inflation increases the cost of building materials, which in turn raises the cost of construction. Materials like steel, concrete, gypsum, cement, copper, lumber, steel, and aluminum are becoming more costly. This is due to increased production costs, driven by rising wages and energy expenses. As a result, the cost of repairing or rebuilding a home that has been damaged or destroyed also increases, leading to higher payouts for insurance companies.
Insurers take into account market data like inflation and construction costs when setting premiums. As these costs surge, insurers must respond by adjusting deductibles, building limits, and other coverage options to ensure they can adequately cover potential claims at the start of a new policy term. This means property owners and developers may have to pay higher insurance premiums to safeguard their investments.
Rising construction costs can also lead to properties being undervalued. If construction costs rise at a rate of 4% annually, a property's value would be undervalued by 22% over five years if the property value is not adjusted in the insurance policy. This can leave the property owner drastically underinsured at the time of a loss.
To keep up with rising construction costs, insurance providers assess their pricing models based on the replacement cost value (RCV) of insured properties. The RCV is the price to repair or rebuild a property using the same materials and quality of construction in the same location. As construction costs rise, the RCV of the property increases, and insurers must adjust their premiums accordingly.
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Conflicts of interest between strata managers and brokers
Strata insurance rates in Australia have been increasing, and conflicts of interest between strata managers and brokers are a contributing factor.
A conflict of interest arises when a committee member or strata manager has links to an outside provider, such as an insurance broker, that may compromise the body corporate's decision-making. In the context of strata insurance, this occurs when strata managers receive commissions and benefits from insurance brokers for facilitating the sale of insurance policies to strata owners. Strata managers may also have business relationships with insurance brokers, creating a "cosy relationship" that can influence the premiums paid by strata owners.
For example, a strata manager may go through an insurance broker to find insurance for a building. The broker receives a commission from the insurance company, typically around 20% of the premium. The broker then shares this commission with the strata manager as a "thank you" for bringing them business. This creates a conflict of interest as the strata manager may be serving their own interests instead of the owners' corporation and individual strata owners' interests.
To address this, disclosure and transparency are crucial. Strata managers must disclose any potential conflicts of interest and ensure that their decisions are not influenced by personal gains. Additionally, strata committees, lot owners, and body corporate managers should be proactive in budgeting for premium increases and seeking expert advice to navigate the challenging strata insurance market.
While the strata insurance market in Australia is expected to remain challenging, addressing conflicts of interest and increasing transparency can help mitigate the impact of rising insurance rates on strata owners.
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Increased claims and high loss ratios
Strata insurance rates are on the rise due to several factors, one of which is the increase in claims and high loss ratios. Natural disasters, such as floods, bushfires, and cyclones, have resulted in a growing number of severe weather events and catastrophes, leading to an increase in claims. This rise in claims places a strain on insurer profits, prompting them to increase premiums across the board, especially for properties with pending claims or outstanding rectification work.
The impact of these severe weather events is further exacerbated by the presence of non-compliant building materials and property defects. Insurers are now imposing higher excesses and cover exclusions for strata properties with these issues, as they contribute to higher repair costs. For example, the presence of Expanded Polystyrene Sheets (EPS) and Aluminium Composite Cladding (ACP) is considered a fire risk, leading to higher premiums.
In addition to the impact of natural disasters and property issues, the increase in claims and high loss ratios can also be attributed to the way buildings are used. For instance, if a building contains units used for holiday letting or "high-risk" business activities, it may impact the risk profile of the property and subsequently result in higher premiums.
To manage the high loss ratios, insurers employ various strategies. They may increase premium rates to bring loss ratios back into balance, acquire more capital from reinsurers, or place restrictions on the types of risks they underwrite. For example, they may decline insurance on high-risk properties or impose higher excesses for properties with cladding or combustible building materials.
It is important to note that the increase in strata insurance rates due to high loss ratios is not expected to continue indefinitely. Once claim ratios improve, potential legislative measures are implemented, and sufficient capital flows back into the strata insurance market, the rate increases are likely to subside, returning to softer market conditions.
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Changes in underwriting guidelines
Strata insurance rates are increasing due to a variety of factors, one of which is changes in underwriting guidelines. Underwriting guidelines refer to the criteria that insurance companies use to assess and price the risk of insuring a particular property. When underwriting guidelines are tightened, as they have been in the strata insurance market, it means that insurers are becoming more selective about the properties they insure and are increasing premiums for properties that represent a higher risk.
Properties with a high frequency of claims, defects, or maintenance issues are now subject to stricter underwriting guidelines, which can result in higher premiums or even difficulty obtaining insurance coverage at all. This is because multiple claims or issues with a property impact the risk profile of the property, making it less attractive to insurers. Insurers are also applying special policy conditions and cover exclusions to strata properties categorized as "high risk". For example, insurers are moving towards applying a minimum excess of $1,000 on basic claims, with higher excesses imposed on properties with a high frequency of claims.
In addition to claims history and maintenance issues, the way in which a building is used can also impact its risk profile. For instance, if a building contains units used for holiday letting or "high-risk" business activities, this can affect the underwriting guidelines applied to the property. Underwriters will also consider whether a building has outstanding rectification works or pending insurance claims, as these can further increase the risk and cost of insuring a property. As a result of these changes in underwriting guidelines, there has been a noticeable shift in risk appetite within the strata insurance market over the last 12 months.
It is worth noting that the increase in strata insurance rates is not solely due to changes in underwriting guidelines but also a combination of other factors. Recent catastrophes, such as severe weather events and natural disasters, have contributed to increasing claims and placing strain on insurer profits. This has resulted in upward pressure on strata insurance premiums across the board. Additionally, the financial dealings between strata managers and insurance brokers, including commissions and broker fees, can also impact the premiums paid by strata owners.
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Frequently asked questions
There are several reasons why strata insurance rates are increasing. Firstly, the frequency of claims has increased due to severe weather events and natural catastrophes. Secondly, there is a conflict of interest between strata managers and insurance brokers, with commissions and broker fees affecting premiums. Thirdly, changes in underwriting guidelines, increasing reinsurance costs, and rising loss ratios have contributed to higher rates. Additionally, rising construction costs and inflation have played a role in the increasing strata insurance rates.
Market analysts predict that strata insurance rates will continue to rise in the foreseeable future. Strata committees, lot owners, and body corporate managers are advised to budget for premium increases of at least 20% when policies are up for renewal. Some strata premiums are increasing by as much as 35%.
In addition to the frequency and severity of claims, other factors include the building's risk profile, maintenance issues, and the impact of "high-risk" tenants or businesses. The relationship between strata managers and insurance brokers, including commission structures, also influences premium rates.
Rising strata insurance rates impact owners by increasing their strata levies and overall insurance costs. Owners may also experience restricted cover availability and higher excess payments.
To minimise the impact of rising strata insurance rates, owners can engage a skilled strata insurance broker who can negotiate the best policy terms and conditions. Additionally, ensuring proper maintenance and addressing any defects or maintenance issues can help reduce the risk profile of the property and potentially lower premium rates.
