Thursday, October 19, 2023

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HoneIn FY24 Q1: Strata Insurance Market Update

Buildings with defects received the most challenging premium increases and imposed policy conditions in Q1 on top of facing challenges with obtaining insurance.

Key Insurance Outtakes from Q1

Since the start of FY24, strata premiums are increasing nationally by about 15-20%. These increases are driven by claims costs inflation, rising building valuations, and insurers raising rates after periods of losses. Looking forward, committees, lot owners, and body corporate managers should anticipate premium hikes of 15-20% for clean claims records and up to 30% for those with challenging claims histories. Occasionally, premiums for desirable risks have begun to stabilise due to underwriters re-entering the market with new risk appetites and Northern South East Queensland receiving benefit from the ARPC Cyclone Pool.

Buildings with defects received the most challenging premium increases, imposed policy conditions and challenges with obtaining insurance. Strata managers and owners should work closely with insurance brokers to communicate clear action plans and regular progress updates to insurers for known issues such as open claim causation maintenance or defects.  

International Insurance Markets can provide an alternative for insureds when local insurers don’t provide cover, but we continue to observe cost-prohibitive premiums.

Buildings in Northern Australia may notice premium relief if eligible for inclusion in the ARPC cyclone pool. The cyclone pool is designed to lower insurance premiums for households and small businesses with high cyclone and related flood damage risk by reducing the cost of reinsurance. All major insurers are required to join the cyclone pool by December 2023 but it remains to be seen if insurer underwriting appetite and capacity in North Queensland will change.  

New Development Trends in Australia's Major Cities

The Urban Development Institute of Australia (UDIA) has released its 2023 State of the Land report, a study into the strata industry for buildings constructed in 2022, and an overview of the new development pipeline in major cities.  

In 2022, multi-unit dwelling completions in capital cities dropped by 3%, totalling 45,429 units, down 45% from the 2017 peak. Meanwhile, the pipeline for new multi-unit supply has decreased by 1% overall, with the most significant reductions in Melbourne, Sydney, and the ACT. Southeast Queensland’s pipeline increased by 12%, driven by 'Early Planning' and 'Under Construction' units, while Perth stabilised with a 3% increase, and Adelaide's pipeline reduced by 3%.

Challenges Affecting Strata New Development Growth

Lending for the construction of dwellings has decreased significantly, with lending for newly erected dwellings also down due to rising interest rates. Further interest rate increases are expected to continue putting pressure on housing market activity in 2024. International supply chain disruptions during the pandemic, rising freight costs and increased construction material costs and shortages have driven up housing construction input costs. Prices of materials like timber, plaster products, and concrete have increased, impacting building costs. The same supply challenges and increased costs for buildings materials that are challenging for developers also impact the insurance industry in relation to claims cost escalation and underinsurance.

New Property Developments – Takeaways for Owners and Developers

Poor Design and Quality
Two decades of declining design and building quality in large multi-level developments have resulted in a host of issues including structural defects, passive fire penetration defects, waterproofing failures, and water ingress issues. Structures containing materials, such as flammable ACP cladding or NRG Greenboard (rendered EPS foam), are attracting higher premiums, the insurer appetite for buildings containing these materials continues to be limited.  

The growing popularity of garden rooftops, rooftop pools, and balcony greenspaces has raised insurer concerns about water membrane failures, maintenance issues, and fire hazards. We have also seen instances where strong winds have blown trees off rooftop greenspaces which is a potential liability exposure. We urge property owners and developers to assess and conduct risk surveys for long-term design and build quality. The Body Corporate should have current maintenance programs in place.  

Each insurer has a set of underwriting guidelines that influence their risk tolerance and in turn, the premiums they offer for new developments. Insurers can change their underwriting guidelines and premium rates, varying from 50%-100% from time of indication quoting until practical completion which can be years later.  

Strategically Timed Insurance Placement

Upon practical completion of the development, the construction insurance policy ceases to provide coverage. At that time a strata policy should be put in place to provide insurance coverage for the building. After the registration of the Body Corporate (BC), the developer must secure insurance for a full year from the registration date. This requires an endorsement to extend the policy's expiry date. Some insurers enforce mid-term policy cancellation and subsequent reinstatement for a full 12 months from the registration date.

A comprehensive insurance valuation should factor in debris removal, professional fees, escalation, and complete rebuilding expenses.

Precise Valuations for New Developments and Existing Strata Buildings

At Honan, we address concerns regarding second-year premium increases within Bodies Corporate following property valuations. Opting for insurance coverage solely based on the project's construction cost can result in insufficient coverage in the event of a total loss. International supply chain disruptions, rising freight costs, and increased construction material costs and shortages have driven up housing construction input costs. In turn, this increases the cost to repair or replace properties in the event of a claimable loss.  

For this reason, a comprehensive insurance valuation should factor in debris removal, professional fees, escalation, and complete rebuilding expenses. We strongly advocate for an independent valuation before practical completion or within 60 days thereafter, ensuring the initial premium reflects the building's complete replacement cost. Existing Strata Buildings should also make sure their valuations are up to date. Individual state legislation and recommendations vary, calling for updated valuations anywhere from 2 to 5 years. Please refer to the relevant legislation for your State / Territory.  

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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