“It certainly is a growing issue and concern,” said Teighan Carr (pictured above).
Carr is head of client services for strata and real estate with Honan Insurance Group. She was referring to the underinsurance issue facing the strata sector.
A recent quarterly market update from Honan found that, on average across the country, strata insurance premiums are going up by between 15% and 20%. Some are rising by as much as 35%. These increases, she suggested, are widening underinsurance gaps.
One complicating factor: every state follows its own rules.
“Each state has their own regulation around strata committees or owners’ corporations obtaining valuations for their property and that’s governed by the Strata Act,” said Sydney-based Carr.
The rules in NSW, she suggested, are particularly prone to worsening underinsurance.
“In NSW, there’s actually no timeframe on when an owners corporation needs to obtain a valuation of the property,” she said. “In other states it’s anywhere between three to five years.”
Carr said the Strata Act places responsibility on the owners corporation to insure their building for the full replacement value.
“If they’re not seeking professional opinions on that quite regularly and given the cost of inflation at the moment, if all of that’s not being accounted for in the building sum insured amount, we are seeing significant under insurance issues,” she said.
An example played out in numerous property damage claims, she said, following the bushfires down the NSW south coast in 2019.
“This was really highlighted during the bushfires where we saw a number of claims where it was not a total loss because some of the building was still standing but it was a major loss claim and the building sum insured amount had been completely exhausted,” said Carr.
This demonstrated, she said, that some owners corporations were not insuring their buildings for a sum insured that was sufficient to totally rebuild.
“In addition to that, you do find that if you are caught short by an insurance claim that the insurer will want to cash settle for the balance rather than support a rebuild, because there’s just not enough cost there to fully rebuild,” she said.
Despite these strata challenges, Carr said there are things brokers can do, particularly during the pre-renewal process, to improve the result for the insured.
“A broker needs to ask the right questions and make sure they’re getting the level of information required, whether that’s around fire safety, security at the property or maintenance works that the owners corporation has done to improve the risk profile of the building,” she said.
Technology is also helping the strata insurance process, particularly at Honan where their strata business operates at scale.
A few months ago, Honan automated its strata quotation process. Previously, this entirely manual process required each data field to be inputted. According to TCG Process, who provided the automation software, Honan has saved more than 5,300 hours nationally as a result.
“It’s making a huge difference,” said Carr.
She said quotes from underwriters that were being manually inputted are now automatically scanned.
“What that’s doing internally for us is enabling us to get information up and into our system quicker which is ultimately allowing us to better service our clients,” she said.
In a growing sector that’s a large part of the Australian economy but only has “a handful of specialized brokers and underwriting agencies,” she said all stakeholders should be looking at any technology driven operational efficiencies.
Another tool in the broker’s kit is educating clients.
“Something that we do here at Honan with our clients, so our strata managers and owners corporations, is continue to educate and be available for them around what’s happening and give them an understanding and how it can link back to their individual building and what can be done,” said Carr.
She said this educational role, particularly explaining premiums increases, is “really important.”
One major strata issue identified by John Trowbridge during his independent review of the strata insurance sector was what he described as the opaque nature of broker fees. Trowbridge called for a complete overhaul of the broker fee system.
“I can only speak on what Honan does and for us,” said Carr. “Our broker fee is on the invoice that we issue to the address of the owners corporation.”
Carr said smaller residential buildings are not experiencing the same premium increases as larger ones.
“It’s not all sad news,” she said. “On your smaller residential buildings there is a larger pool of underwriters that you can utilise to obtain quotes and we are seeing that often there is an alternate insurer out there who can offer a more competitive quotation for the renewal.”
Honan regards itself as a leader in Australia’s strata insurance sector and is one of the biggest players.
According to TCG, Honan receives more than 120,000 strata policy quotations from insurers every year.
In a recent interview with Insurance Business (see below), Honan’s CEO Andrew Fluitsma said his firm’s performance in the strata sector is one of the reasons brokerage giant Marsh recently bought them.
“Our organisation is doing incredibly well in the middle market and the corporate risk area,” he said. “We are doing a lot to be best of breed in the strata and high-end strata property sector.”
Fluitsma said this position as “a middle market giant” integrates “incredibly well with Marsh’s ambitions to be the dominant broker across all sectors of the market.”
Andrew Fluitsma is recognized as one of the Top Insurance Executives and Professionals in Australia. Learn more here.
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