Tuesday, June 14, 2022

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Spiralling building costs & implications for strata insurance

A recent report prepared by the Master Builders Association on the cost of home building materials has revealed a 4.2 per cent jump in costs during the March 2022 quarter and a 15.4 per cent increase from a year ago. This is the most severe increase the market has seen since 1980. For the year to March 2022, the highest price increases in building materials included:

 

Source: Master Builder Association, 2022­.

What does this mean for your insurance?

Premiums

Insurers price each risk at the time of policy placement. However, the rapid increase in building material costs means that if a large claim occurs, the premium collected may be well under the actuarial modelling predictions, putting more inflationary pressure on future insurance premiums.

As shown below, the growing cost of materials from the time the premium in a policy is collected through to the settlement date means the insured value may not reflect the actual cost to repair/replace/rebuild.

 

As shown below, the base premium on a policy is quickly eroded by expenses, claims and commissions. Once increased costs of building materials and spiralling labour costs are considered, the profit margin is very thin or in many cases, non-existent. The growing cost of materials is a global phenomenon so the only lever insurers can pull is to increase base premiums.

Claims processing

In addition to increased costs of materials, there has been a significant slowdown in the processing of the recent QLD and NSW weather event claims. For example, where previously the time between the date of loss to the claim settlement date could be 3 weeks, it is currently closer to 3 months.  To help manage the delays, insurers have added more claims staff, additional assessors have been flown in from overseas, and Honan has added more claims employees. Despite these measures, there remain delays. These delays can also result in higher insurance claims costs for Temporary Accommodation and Loss of Rent.

NEXT STEPS

Unfortunately, we expect premiums to increase.  We are encouraging clients to budget an extra15-20% for the cost of insurance in the coming year.

Apart from rising premiums, the main concern for a Body Corporate may be the potential to be underinsured. Given the rapidly rising costs of building materials, we recommend that Committees consider obtaining a new Insurance Valuation report sooner rather than waiting for the usual 5 years.

We are here to advise and support you. Please reach out at any time to discuss your insurance needs.

Matthew Henderson

Operations Manager – Underwriting Facilities & Strata

matthew.henderson@honan.com.au

 

Chris Glass

State Manager (QLD) - Strata Insurance & Risk Solutions

chris.glass@honan.com.au

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