July 2023 Market Update – Strata

The strata insurance market continues to harden with insurance premiums subject to sustained increases. Even where there has been no claims activity or increase to the sum insured, premium increases of around 10 per cent are standard. Increases well above 10 per cent can be expected where property is subject to increased risk of natural disaster or extreme weather events.

There are many factors driving the cost of strata insurance, including:

Increased regularity of severe weather events, locally and globally.

Rising costs of reinsurance – insurance for insurance companies.

Insurers having higher quality data – risk mapping and correction of previous under-pricing.

Increase to Emergency Service Levy – taxes payable on insurance premium.

Withstanding the above, the key driver continues to be the increase in “claims frequency” and “claims costs” for strata buildings.

The frequency of claims due to weather events over the last few years including poor construction practices with newer builds, continues to see the number of claims reported each year increase. Water damage remains the number one source of claims.

In addition to the increased frequency of claims, the post COVID-19 impact to the building industry saw building repair costs surge in 2022. Repairers were reporting significant material delays of up to a month on goods including timber, steel, windows, doors, roof tiles, bricks, electrical equipment and waterproofing insulation.This impact has abated in 2023, where we have seen steady supply returning to the market, with costs beginning to ease.

Labour shortages remain a key issue with the lack of available skilled trades people. Even where materials can be obtained at a reasonable price, there are issues with finding qualified contractors to complete the work.

Builders are struggling to hire carpenters, bricklayers, glaziers, roof installers, plumbers, electricians and general labourers. Cost increases for these trades are all going up over 15 per cent and causing significant delays in repairs. These delays further compound claims costs through lengthy loss of rent / temporary accommodation expenses.

The strata insurance market is dominated by 4 underwriters / insurers who have approximately 90 per cent of market share:

CHU Underwriting – QBE

Strata Community Insurance (SCI) – Allianz

Chubb / Longitude

Strata Unit Underwriters (SUU) – CGU.

There have been no new local general Insurers to enter the strata market to compete with the big four. The only new entrants into the strata market have been Lloyds backed underwriting agencies, which is generally a reflection of a hardening market sector and premium increases.

In past years, strata insurers were to some degree under-pricing accounts to grow their market share. Claims costs quickly changed many insurers approach and appetite for strata and resulted in the likes of Zurich, Vero, AIG and ACE exiting the strata market. This in turn resulted in less competition.

Insurers have invested heavily in technology in recent years and have improved data collection and analysis. This has led to stricter underwriting guidelines and greater scrutiny of new business.

In particular, buildings with defects, cladding remediation or claims frequency/severity is where the strata insurance market is hardening the most. In these instances, clients will experience significant premium increases, restricted cover and higher excesses. Obtaining alternative quotes from local markets for these types of risk is proving difficult and may require offshore market placement.

It is imperative that Owners Corporation’s / Bodies Corporate can demonstrate a proactive and timely approach to defects rectification, remediation works, general maintenance and adherence to risk recommendations. See our recent article here.

To minimise impact to your insurance premium, cover and conditions, we recommend the following action points be undertaken with our assistance and tabled with insurers as early as possible:

Itemise and prioritise any and all defects requiring urgent remediation.

Nominate an EC member or strata manager to manage remediation.

Create a management plan to mitigate further damage to the property. e.g., temporary repairs.

Prepare a budget and project repair plan for each defect, report on these as an ongoing action item in Strata Committee meetings.

Provide regular updates to Bellrock Strata and ensure that these are provided to your insurer regularly.

The disclosure of a considered remediation management plan and action outcomes have been key in achieving positive results for our clients over the last 12 months.

Over the course of the next 12 months, we expect that rate increases will continue to rise around 10 per cent, however it will continue to be challenging to obtain competitive coverage for clients that exhibit the aforementioned problematic risk profiles, particularly when proactive risk management steps are not in place.