Tuesday, August 1, 2023

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FY23 Q4 Market Update: Strata

FY24 has commenced with strata insurance premiums continuing to increase nationally by approximately 15 -20%.  Premium increases are being impacted by inflationary pressure on claims, increasing valuations of buildings, and insurers applying rate increases following prolonged periods of losses. These increases in premiums include buildings that are classed as low-hazard commercial occupancies, or properties without a challenging claims history, outstanding defects, or combustible cladding.

There are limited options available for medium-high hazard commercial properties, properties with outstanding defects, a challenging claims history, combustible cladding, or those requiring coverage exceeding $50M. As such, we are seeing higher premiums as well as excess increases. Depending on the details provided in the submission, particularly regarding defects and cladding, we may need to explore international insurance markets where premium increases of over 100% are common. This means it is essential for strata managers and owners to work closely with their insurance broker, taking a proactive approach to address any existing issues and providing regular and detailed updates to help secure local coverage.

Nevertheless, we have observed occasional reductions in premiums for the desirable ‘vanilla’ risks in preferred locations. New entrants and the return of some underwriting agencies have allowed us to approach more markets and optimise terms for our strata clients.

Escalating costs associated with construction materials have raised concerns around underinsurance in strata properties as the insured value may not be sufficient to accurately reflect the actual cost of rebuilding the property to its pre-loss condition. The building sum insured should always allow for the building to be returned to its condition prior to the insured event, including all associated costs (e.g., the value of demolition work, removal of debris, surveying, engineering, architectural fees, etc.). A professional valuation of all insured property should be obtained by a certified valuer where possible.

In Victoria, the most recent amendment to the Strata Legislation the 2006 Owners Corporations Act on 1 December 2021 made it a legal requirement for an Owners Corporation (more than two lots) to have an Insurance Valuation completed every five years. This change in Victoria is in line with Queensland’s legislation, stating the Body Corporate must, at least every 5 years obtain an independent valuation.  The NSW Government removed the requirement for valuations a number of years ago and recommends having a new building valuation completed every two to five years by contracting a certified valuer. Other states have the same or similar requirements, so be sure to refer to the relevant legislation for your state/territory.

Although this represents a step in the right direction, it is crucial for clients to regularly review their building sum insured and ensure it is adequate.  In the event of a significant loss or complete destruction of a building/s, any shortfall in insurance cover must be funded by the owner/s. To reduce the risk of underinsurance, Owners’ Corporations may consider indexing their Building Sum Insured (5% to 7% is common) every renewal or midterm when in between valuations to remain at pace with growing costs and inflation.

Several insurers are now requesting a copy of the most recent insurance valuation before considering offering formal terms.  Insurers price each risk at the time of policy placement with the insurable values being one factor considered. With the cost of materials increasing and Insured Value remaining the same for several years, the premium collected at renewal may be well below the actuarial modelling predictions.  In the event of a claim, the base premium on a policy can be quickly eroded by claims expenses as well as the policy commission. Therefore, the profit margin is very thin or non-existent. As such, insurers are continually increasing base premiums or reluctant to quote properties without a recent insurance valuation or change to the insured values. 

Three of the four major insurers, Allianz, QBE, and Suncorp have now joined the Australian Reinsurance Pool Corporation (ARPC) Cyclone Pool. Strata underwriting agency CHU (backed by QBE Insurance) will join from July 29, 2023. SURE Insurance (representing Liberty Mutual Insurance Company and other insurers) has also joined. All large and small General Insurers (as defined by the pool) will participate by December 31, 2024.  The primary objective of the Pool is to enhance the accessibility and affordability of insurance for households and small businesses in cyclone-prone areas across Australia. ARPC can absorb large losses and provide finance over a longer period than insurers. When preparing for weather events such as cyclones, insurers must increase the premium to account for these incidents.

Who qualifies for the ARPC Pool?

Residential Strata: Properties used for residential purposes between 50-100% of the time.

Commercial Strata: Properties that are used for commercial purposes with a combined building sum insured and common area contents value that does not exceed $5M.

Catastrophic events covered by the Pool includes named cyclones and any cyclone-related flood damage, including wind, rain, rainwater, rainwater runoff, storm surge (if the existing policy provides this cover), and riverine flooding caused by a cyclone. The Cyclone is covered from the moment it is announced, causing damage as it approaches land. If the Cyclone occurs over days or weeks, it will be included in the Pool. It is important to note cover stops 48 hours after the Cyclone is declared ceased.


Whilst the Pool is available Australia-wide, it will have the biggest impact on those located in cyclone-prone areas such as Northern Australia where it is difficult to source or afford adequate coverage for these types of events. The impact on premiums will vary depending on the location, however, CHU has indicated savings of up to 37% can be expected for properties in highly exposed cyclone areas in Northern Australia. It should be noted that the underwriting methodology used by the Pool has not been released. Reductions in premiums are not assured and underwriting rates and performance of the scheme will be followed closely in the coming months and years.

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Honan Insurance Group Pty Ltd is now fully owned by Marsh Pty Ltd. To find out more, speak to your broker or read the announcement