Australians are embracing the benefits of both living and working in strata title developments, says Bobby Lehane, CEO at CHU Underwriting Agencies
. And according to Strata Communities Australia, around 50% of the nation’s population will work or live in strata by 2040.
Lehane describes the strata insurance market as “very dynamic”.
“There have been a number of new entrants in the market over the last couple of years, which, in addition to the soft market cycle, has driven a significant suppression of rates as the new players strive to find market share and secure survival,” Lehane tells Insurance Business.
He says the industry has seen double-digit levels of discounting for the past two years.
“I believe the market should be a billion dollar market, in terms of insurance premium. In fact, it’s probably closer to $750-$800m at this point in time,” Lehane says.
But he adds that there are positive signs that the market is turning.
“In the last quarter of last year, we started to see the discounting slow down and, certainly this year, we’ve started to see the market harden, as in the commercial insurance space,” he says.
However, Lehane doesn’t expect that rates will rise dramatically.
“What we’re going to see is a slow and gradual adjustment over the next 12 to 18 months. It’s not going to go up as dramatically as it has come down over the last couple of years, in my opinion.”
Choosing strata coverage
When it comes to the purchase of strata products, Lehane mentions several attributes that should be taken into account in that process. He mentions the need to ensure minimum legislative requirements are met, as well as the importance, as with any insurance type, of veering clients away from decision-making purely around price.
“The phrase ‘not all things are created equal’ is never more relevant than in strata insurance,” Lehane adds.
“While the products may look similar, we see, with the influx of new players, that there are vast differences in the quality of service and of security.”
He expects the trend of entrants coming and going from the market to not only continue, but even accelerate, as in many industries.
“If you can reconcile product differences, satisfy yourself that the service and security will meet expectations at least for this year, then a key question to ask in the current strata environment is: Will the chosen provider be in the market in three years’ time? Loyalty is recognised both formally and informally, so giving clients the opportunity for continuity should be a key consideration.”
And, as Lehane emphasises, claims performance is the key to a satisfied customer.
“Strata insurance has a high claims frequency,” he says.
“The majority of feedback we get from the market is about the need for a smooth and efficient claims process. Brokers need to look at how the insurer handles claims – are they centralised or decentralised? Are they onshore or offshore? Are they outsourced or in-house? Do the claims teams have the relevant experience in strata with the ability to respond quickly?”
Lehane flags the need for brokers to be on the lookout for non-compliant strata policies.
“Strata insurance policies cover material damage to structural fixtures, including fixed plant, machinery and underground services resulting from an insured peril. These policies also provide cover for owners’ fixtures, fittings and improvements, which form part of the building.
“Many policies offered in the market are household policies that may not cover the full requirements of the strata legislations.”
Lehane also adds the need for brokers to ensure their clients are clear on precisely what is insured by their strata policies.
“Many lot owners and tenants in strata complexes incorrectly believe all of the personal assets are protected as part of the strata insurance policy,” he says.
“Strata insurance specifically excludes contents within individual units such as carpets, curtains, blinds, light fittings and electrical appliances not actually wired into the premises. These items should be insured by contents insurance or a landlord insurance policy.”
A holistic approach
And when it comes to work on top of efforts to secure suitable strata risk transfer solutions, how else can brokers assist their strata clients?
“Strata developments are becoming more complex and so are the risks. The need for broker advice is now more necessary than ever,” Lehane says.
That advice, he says, should include additional coverages that should be purchased.
“While building and liability insurance is mandated, there are a number of risks strata committees need to consider. These covers include fidelity cover, officer bearers legal liability cover, machinery breakdown cover, catastrophe cover, government and audit costs cover, and lot owners fixtures and improvements cover.”
When it comes to risk mitigation, Lehane says the strata market hasn’t been renowned for strategies on this front.
“This continued to be a relatively low priority for strata plans through the recent soft market,” he says.
“However, awareness of the value of good risk mitigation strategies will rise significantly as we see the market hardening. This is where the advice from a broker will greatly assist strata clients.”
THE LEGISLATIVE LANDSCAPE
A positive outlook
On 30 November 2016, NSW enacted the Strata Schemes Management Act 2015 and the Strata Schemes Management Regulations 2016.
“This was a wide-ranging review of the strata laws within NSW and included a number of changes to the rules governing strata living in NSW,” Bobby Lehane explains.
“Strata insurance was an area addressed in the review and the new legislation included a number of additional requirements.”
Those requirements included:
• The minimum limit of public liability cover has increased to $20m.
• Managing agents must obtain a minimum of three strata insurance quotes.
• Strata managers must disclose all commissions.
• Strata insurance sums insured must be sufficient to cover the total costs associated with rebuilding and reinstating the strata property in a total loss.
Increased liability risk to strata executive committees.
For more information on the new legislation, head to http://stratalaws.nsw. gov.au
“Other states are currently in the process of reviewing their respective legislations,” says Lehane.
Looking ahead, Lehane describes the future for strata as “very bright”.
“Strata will be the preferred way for Australians to live in the future,” he says.
“If strata can be typified as the modern way Australians will live, CHU is looking to provide solutions for modern living.”
He says, right now, the strata insurance market is behind the times when it comes to embracing technology.
“The processes for underwriting and claims are still manual and there are many inherent inefficiencies in the current systems all providers utilise. This, of course, is not sustainable.”
He expects digital transformation to have an “enormous impact” on strata insurance similar to the way in which it has elsewhere in the industry.
“CHU is taking the leadership role by disrupting ourselves and exploring ways to lead the inevitable change in strata insurance. CHUiSAVER is the first digital underwriting agency with the ability to provide real-time quotes.”
Lehane anticipates strata insurance will begin to follow other lines of insurance, in terms of using higher deductibles to offset premium.
“In home insurance, motor insurance and health insurance, it’s a common tool to offset the increase in premium, but strata hasn’t really caught up with that at this point in time,” he notes.
“One of the things we are piloting through CHUiSAVER is actually having much higher minimum excesses, and that is resulting in premiums that are 20% less.”
Lehane believes the shift may start to happen this year.
“As the market hardens and people are looking to keep their premiums at a manageable level, then they may well be open to the concept of a higher deductible or a higher minimum excess, but we’ll see.
“The uptake of CHUiSAVER’s been pretty positive, and what we’ve found in three-quarters of the quotes that we get [is that] they’re going with a much higher water damage excess.”
As the market starts to harden, Lehane says insurers will bend over backwards for a loyal customer, which reinforces the importance of choosing an insurer partner that will last the distance.
“Just because you make $50 in savings this year doesn’t necessarily mean it’s in the longterm interests of the clients,” he says.
“The competition is there, but not all of them are going to be around [for the duration].”