Despite strata insurance premiums rising, the cost of strata insurance for most individual unit owners continues to compare favourably to a standard household policy.
Whilst most homes are relatively simple constructions, that's not the case with strata. Many strata buildings have complex machinery, such as lifts, sprinkler systems, air-conditioning and even car stackers. Common areas open up legal liability and office bearer risks which are significantly greater exposures than a standard home. Additional benefits can include fidelity, voluntary workers accident cover, legal defence costs and so on.
Given the extended benefits a strata is insured for, it's no surprise that strata policies on average have a claim every one year to 18 months, which is approximately three times more frequent than a household policy. Yet historically, strata insurance has been under priced when compared to the risks covered. According to the Insurance Council of Australia, many strata schemes pay on average 1/3rd of the premiums paid for an equivalent stand alone home policy.
Impact of catastrophes
In Australasia natural catastrophes such as floods and cyclones are also becoming more common due to climate change. The ICA lists over 50 such events on their catastrophe and disaster statistics page in the last 10 years. With the number and cost of claims rising, the only result can be an increase in premiums.
Keeping cost rises to a minimum
One effective way for strata schemes to keep insurance costs to a minimum is to insure through a strata insurance specialist, who understands the risks and nuances of the market. A second strategy is to apply voluntary excesses, just as those commonly seen in domestic and car insurance policies. Most households apply an average of $400 to $500. Yet many strata policies maintain excess amounts well below these amounts.
In the United States the average strata insurance deductible/excess is around $7,500. In Australia, that figure remains in the 'hundreds' of dollar. When you consider that claims with a value of less than $1,000 account for almost two thirds of the total claims pool, you have to revisit the conventional wisdom of transferring every risk to insurers.
What's more, around 25 percent of every insurance dollar collected is made up of hidden government taxes. Add to this another 22 percent for transactional insurance costs (which includes commissions) and the economic argument for strata schemes to retain small losses, rather than to transfer them to an insurer and pay on-costs and taxes, becomes even more compelling.
Owners committees need to fully understand the economics behind their insurance policies and talk through the options which could help them to contain insurance costs with a strata insurance specialist.
A common feature of the strata insurance market is the payment of commissions to managers and other intermediaries such as brokers for arranging policies. This is a well established mechanism in insurance markets to cover the cost of organising policies and dealing with claims. From time to time questions are raised as to whether this is appropriate due to perceptions that it may create a conflict of interest. This gives rise to debate about the cost and benefit of alternative ways to meeting the cost of insurance-related services in strata. To help inform this debate, SCA commissioned respected economic consultants AEC Group to analyse the strata insurance market. Their, executive summary can be found here and one-page fact sheet here. The full report can be accessed by members via the member centre.
Note: The above article is meant as a guide only. When considering insurance, and budgeting for it, always take into account the individual circumstances of the Body Corporate. Strata Community Australia thanks CHU for their assistance with this article, a version of which first appeared in SCA's member magazine Inside Strata.