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- • Impact of Removing Stamp Duties on Insurance
- • Too Long; Didn’t Read – Enhancing General Insurance Disclosure
- • QLD Floods
- • Non-Insurance
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- • National Disability Insurance Scheme (NDIS): Funding the Unfunded Commitment
- • Consumer research on general insurance product disclosures
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House of Representatives Standing Committee on Social Policy and Legal Affairs' Inquiry into Residential Strata Insurance - FAQs
Has the Insurance Council of Australia taken part in the inquiry into strata insurance?
The Insurance Council gave evidence to the Committee sitting in Cairns in January 2012, and also provided a written submission. It is available here
Why has the strata insurance premium for many buildings gone up so much?
Until recently, strata unit owners were typically paying about one-third of the premium of stand-alone residences in the same area.
Strata unit properties often face similar or even greater risks than stand-alone residential properties and discounted premiums have proven unsustainable. Insurers are now pricing strata property insurance to reflect the risk of the area and the characteristics of the building.
This is particularly noticeable in Far North Queensland, where premiums for strata properties in cyclone-prone regions are now, on average, much closer to parity with stand-alone residential properties in the same area. The change reflects the impact of recent cyclones, including Larry and Yasi.
Insurers have been forced to lift their prices to ensure they have sufficient capital reserves (funds) to cover future catastrophes. Insurers are required under Australian Law to carry sufficient capital to meet claims.
Are these increases reasonable?
Insurers realise rising premiums may have come as a shock to many property owners and managers. However, for many years the owners of strata-title units have experienced unsustainably low premiums, typically paying one-third of that paid by their neighbours in stand-alone residential buildings.
After several years of natural disasters, the commercial reality is insurers must operate under a prudential and sustainable premium position if they are to continue providing insurance. Properties in many areas are now being risk-rated at sustainable levels, and in many cases the premiums remain lower for each unit than equivalent single dwellings.
But many buildings are quite new and cyclone proof. Doesn't that mean strata insurance premiums shouldn't go up?
The Australian Building Code only seeks to protect the safety of occupants, and does not require the building to be resilient to damage. New cyclone-rated buildings are designed to be structurally sound and protect the inhabitants during cyclones by not collapsing. However, they do not prevent damage to the building and its surrounds, or prevent issues such as water entering the building or damage to common areas such as lifts and pools, which can also be affected.
These issues can be very expensive to repair and must be taken into account when calculating the potential cost of a claim and therefore the premium that needs to be charged. Government regulation to improve the durability of strata buildings to extreme weather would help reduce repair costs, and would have a positive impact on the costs of insurance.
What else has an impact on premiums?
Many strata properties carry a very high risk, and high repair costs, due to their location, age, design, features and construction methods - which in many cases pre-date modern cyclone-proof building codes.
Unlike standalone houses, strata properties often have expensive body corporate assets, such as common areas, underground car parks, lifts and pools that can be vulnerable and expensive to repair.
Other factors such as mandatory public liability provisions, claims history, maintenance issues and the way the building is used can also significantly increase the premium payable. Strata buildings that contain units used for holiday letting, or other business activities, will have a different risk profile and premium compared with residential-only buildings and complexes.
The insured price doesn't seem to reflect the value of the property. Why?
In Queensland, insurers are legally obliged to use the replacement cost of a building when writing policies. In a market where property prices are falling, this means a significant gap may exist between the market value (the price at which a property or unit can be sold), and the replacement value (the cost of rebuilding). Building costs are also growing at a rate well above inflation, and this may be factored into insurers' calculations.
Are insurers walking away from Far North Queensland?
Strata insurance is a specialist product offered by a limited number of insurance companies. The impact of high claims numbers in recent years due to natural disasters and unsustainably low premiums means some insurers have decided not to accept new policies, or are limiting their exposure to cyclone-prone areas.
However, competition remains in the market. It is likely a return to sustainable premiums will result in other insurers deciding to increase their exposure to the high risks associated with Far North Queensland, and to start offering strata insurance.
Is this market failure?
Competition remains in Far North Queensland for this product category, and it is likely more insurers will start offering products if the commercial framework is viable. Market failure is not defined by price and the facts show that strata insurance is affordable when compared with stand-alone residential properties.
What can strata committees do to lower the cost of insurance?
Each insurer makes its own decision about pricing in accordance with the risks and other factors it believes are relevant. Strata committees should assess their individual risk to see what cover they require and can seek exclusions if they don't consider something a risk.
Committees can also examine other elements of their policy, such as the amount of excess, which can affect the annual premium payable. Accepting a higher excess can have a significant impact on the premium. Some body corporate managers set very low excess levels so that a large number of small claims can be made during the year. The average individual excess payable in stand-alone residential property is $500.
What if I still don't agree with my insurer's premium?
Many insurers offer strata insurance and can provide competitive policies and premiums. If a policyholder is not satisfied with their premium, or believes their policy inclusions leave them financially exposed, they can ask their insurer to review their premium and cover (they can provide additional relevant information to help their case), or can shop around for alternative cover.
What else can strata property owners do to lower the cost of insurance?
Premiums are calculated based on the risk of insured events occurring and the cost of repairs. A key factor in policy pricing for strata is a global reassessment of Australia's risk by reinsurers. Catastrophes in 2011 and 2012 have cost insurers almost $5.25 billion in extra payouts.
Insurance can't prevent the physical impact of disasters, but it can help property owners recover. It is the role of governments to mitigate the risks to communities through physical and policy measures including:
- Improving risk mitigation against natural hazards
- Modernising building codes to make insurability a key criteria
- Ensuring that land-use planning takes into account the nature of the risks in that location and controls development accordingly
- Not charging property owners who insure with taxes on their premium.
Commonwealth and state taxes add 18.25 per cent to insurance premiums in Queensland. This has a significant influence on the affordability of insurance.
Some property managers complain they can't find insurance for strata properties with a replacement value above $5 million. Isn't this a form of market failure?
Several insurers will insure this type of building, and others may offer policies on a case-by-case basis. Competition remains in the market and this is not a case of market failure. Ask your body corporate manager to shop around through more than one broker.
Should the Federal Government intervene?
The Insurance Council believes government intervention in the private insurance market needs to be carefully considered, since it could distort the price signal being sent to communities about the risks associated with their region. If governments wish to intervene in the private insurance market, careful analysis of the costs and benefits must be undertaken.
Such an economic analysis might properly be undertaken by a body such as the Productivity Commission and may build upon work being conducted by the Commission as part of its inquiry into climate change adaptation.
In the ICA's view, greater government emphasis should be placed on helping communities adapt to extreme weather, rather than subsidising the recovery costs of avoidable devastation.