In recent times, Strata Insurance has been a bone of contention for many Strata Managers and Owners Corporations (OC) across Australia. Non-compliant building materials, property defects, and hardening insurance markets have seen Strata Insurance premiums increase substantially, often with restrictive policy conditions and high excesses imposed.
To help your clients navigate these challenging Strata Insurance market conditions, this article provides key information on the ‘state of the market’, why insurers have responded in this manner, and what you can do to achieve the best possible outcome for your clients.
Strata Insurance ‘State of the market’.
- Strata Insurance is currently experiencing hefty premium increases, where rate hikes of 20% are becoming the norm.
- Cladding excesses’ of $100K, or 10% of a Building Sum Insured (whichever is the greater) have been applied to many strata properties in the event of a fire, where ACPs (Aluminium Composite Panels) contribute to the outcome.
- Special policy conditions and insurance cover exclusions are being applied to many Strata properties which have been categorised as ‘high risk’ by insurers – this is becoming increasingly common.
- Strata Insurance is becoming harder to place across the market, with insurers declining to provide insurance quotes for strata properties with building materials deemed as ‘risky’ – even those without ACPs.
A skilled Strata Insurance broker can be instrumental in keeping price increases to a minimum for your OC clients, while also negotiating the best possible policy terms and conditions for the Strata Insurance.
Strata Insurance market conditions & rate increases.
Before we explain how to combat these insurance market conditions, it is important to provide some background on why insurance rates are increasing, and policy conditions are becoming more restrictive.
In general, Australian insurance markets are hardening. We are witnessing rate increases of at least 10-20% on almost all Strata Insurance policies, even for those risks that are deemed ‘good’ in the insurers eyes.
Why are rates increasing?
Over a sustained period, insurance companies have experienced high loss ratios, putting upward pressure on insurance premiums, and invoking tighter policy conditions e.g. higher excesses, cover exclusions, and restrictions on the insurer’s risk appetite (i.e. risks they are able to cover).
What is a ‘high loss ratio’?
A high loss ratio occurs where an insurer’s claims payouts are a high proportion of the total funds in the insurer’s premium pool. This can present a problem, because a loss ratio that is too high, can subsequently put an insurance company in poor financial health.
If the insurer exhausts their premium pool with too many claims payments and not enough incoming money to top up the premium pool, they would be unable to pay insurance claims.
In response to a high loss ratio, insurers may take the following measures:
- Increase premium rates to bring loss ratios back into balance,
- acquire more capital from their reinsurer to top up the funds, and / or,
- place restrictions on the types of risks that can be underwritten e.g. decline insurance on high risk properties that are more likely to have a sizable loss i.e. buildings with cladding, or highly flammable building materials.
This scenario is currently occurring in the Australian insurance market, where international reinsurance companies which fund our insurers, are dictating higher rates back to Australian insurers. This ensures the reinsurers can continue to keep premium pools in balance and pay claims. As a result, Australian insurers have their hands tied, and are forced to pass on higher insurance premiums, and greater cover restrictions to the consumer.
Strata buildings with ‘at risk’ combustible or non-compliant building materials, EPS, defects, or a poor claims history can have high premiums and excesses imposed, or even be declined cover. As a Strata broker, this can significantly limit the number of insurance companies we are able to approach to place Strata Insurance, making it increasingly difficult to obtain cover for certain types of buildings, and/or at a reasonable cost to the OC.
Non-compliant cladding, combustible building materials & the insurance market response.
In addition to the hardening market, Strata Insurance has also been hit by the highly-publicised issues surrounding non-compliant and combustible building materials e.g. ACP / cladding.
Sizeable losses, and the increased fire risk posed by specific building materials, have seen many Strata insurers take the following measures:
- Impose high cladding excesses
- Impose specific insurance cover exclusions
- Refuse to provide Strata Insurance quotes for ‘high risk’ buildings that feature combustible or non-compliant building materials.
At renewal, an insurer applied a ‘cladding excess’ of $100,000 or 10% of the Building Sum Insured (whichever is the greater) to a Strata Insurance policy. This ‘special excess’ would apply in the event of a fire at the property where cladding contributed to the outcome.
When an alternative quote was sought by the OC, many insurers declined the risk based on the fact that the building had partial wooden and copper facades. There was no flammable ACP cladding in sight. Furthermore, this all transpired despite a qualified expert providing a letter to the developer, claiming the facade presented no additional risk to ‘normal’.
In relation to this example, we have outlined in detail why Strata insurers are taking such measures…
i) High cladding excesses, or insurers refusing to quote despite no cladding present.
Some insurers will still impose special policy conditions e.g. ‘cladding excess’ or refuse to quote, based on the presence of cladding or specific building materials like copper or wooden facades. Whether cladding or not, the insurer is more concerned about the fire risk or combustibility that certain materials present, as well as the increased fire severity / loss size that may result.
In the case example, although referred to as a ‘cladding excess’, the excess would likely be imposed due to specific building materials. Sometimes they are non-compliant, but in other cases they simply present an increased fire risk e.g. wooden and copper facades.
- Read more about cladding on the VBA (Victorian Building Authority) website here.
- Read more about the increasing list of non-compliant / problematic building products here.
ii) Cladding excess of $100K or 10% of the Building Sum Insured (whichever is the greater).
In order to keep loss ratios in balance, the insurer would have imposed a cladding excess as a policy condition. This would help keep the premium down for the OC, but also protect the insurers premium pool should a significant cladding / building material related loss occur.
In some extreme cases, we have seen a cladding excess applied for all insurance claims at a Strata property. In most cases, this is completely unfounded.
How a quality Insurance Broker can assist.
a) Competitive premiums.
A number of these markets are only available through insurance brokers, therefore using a broker can help ensure greater competition when it comes to insurance premiums.
Note: Pending a property’s risk profile, the specific risk appetite of some insurers may restrict their ability to provide underwriting terms. In some cases this will reduce the number of insurance quotes available.
b) Negotiating better policy conditions.
Information is everything!
As an insurance broker, it is our job to represent the OC. We are continually negotiating with Strata Insurance companies to reduce premiums where possible, and remove blanket or unfair excesses where they don’t apply.
To enable us to negotiate and achieve better Strata Insurance policy conditions, detailed information is critical. Without comprehensive information on buildings with combustible or other non-compliant building materials, the insurer will always assume the worst – loading premiums, and / or imposing restrictive policy conditions.
Unfortunately, a letter from an ‘expert’ doesn’t typically suffice in these circumstances. We recommend engaging a fire engineer to obtain a full, detailed report which can be provided to the insurer, to give them a thorough understanding of the real property risk.
Even after a strata policy has been placed, and the premium paid, some insurers will refund a loaded ‘cladding’ premium to the OC if the fire engineer’s report indicates the risk is less than initially assessed.
To ensure your clients get the best possible outcome when it comes to Strata Insurance premiums and policy conditions, a specialist Strata Insurance broker can be of great value.
A professional Strata Insurance broker will…
- Provide advice on the type of information and reports required by the insurer, to get the best possible premium rates from the outset.
- Know the best insurers to approach based on the OC’s specific strata building risk.
- Have access to Strata Insurance markets not available to the general public (i.e. ‘broker only’ insurers and policy wordings).
- Negotiate the best possible insurance policy conditions when it comes to imposed excesses and exclusions.
- Negotiate the best premium for the OC’s specific risk.
- Provide personal advice and recommendations for the OC on insurance placement, and any issues that may arise throughout the policy period.
- Manage any insurance claims on behalf of the OC, representing their case to the insurer, always seeking the largest settlement possible.
Should you have any further questions, or wish to engage Resolute’s advice on Strata Insurance placement in what is an increasingly challenging market, please contact our team of specialists:
Ph. 1300 668 033