January 2023 Market Update – Strata

Following our last strata market update, the Strata Insurance industry seems to be stabilising in some cases. To date, we are seeing some insurers’ appetite increasing as they are being more proactive in reviewing risks and implementing attitudes to assist clients with their risks. Outstanding defects, cladding remediation and under-insurance (following construction escalation costs) are all continuing issues faced across the class.

We are seeing a lot more risk recommendations being implemented during the renewal process. Conditions are being imposed by insurers until these are implemented by the policyholder: those conditions are considerable, and significantly limit coverage. Until the risk recommendations are met, and accepted by the insurers, the policy conditions will remain. The key issue for owners’ corporations is to remediate as soon as practicable.

Higher deductibles are being applied where there are “frequency” claims or where strata plans are situated in “high risk” locations (particularly areas susceptible to bushfire and flood zones). Some insurers’ and agencies treaties preclude writing in certain areas altogether and have had to withdraw capacity here.

Many insurers are reviewing ancillary covers, such as ‘office bearers’ liability. We are seeing significant excess increases and lower sub-limits of cover. Further, many insurers are applying “failure to maintain adequate insurance” exclusions. The practical effect of same operates to remove cover to the office bearer, the building management committee or the owners’ corporations where they are pursued by lot owners because there is no, or reduced cover, as a result of a failure to adequately or appropriately insure the plan. Where plans insure directly and this exclusion is applied, they (and natural persons representing them) should be cognisant of this exposure. Indeed where plans outsource obligations to insure (to an insurance intermediary or a Strata Manager) this risk may be transferred to the entity providing that advice.

The failure to insure issue becomes significant in the current market conditions: particularly when one considers the issues regarding reduced coverage, higher deductibles and under-insurance (the latter being impacted by the current costs of construction and the flow on where there is under declaration of sums insured). These issues all traversed in our previous articles.

Since January 2022, we have seen increases between 10-25 per cent. This includes “well performing strata plans” or higher as result of insurers reviewing each risk based on its merits. The following is still being seen during negotiations:

Different risk appetites based on building sum insureds

Claims experiences

Risk management practices and OC’s attitude in mitigating their risk as part of their duty in the ongoing maintenance of their buildings

Increased rates due to insurers ongoing funding into their premium pools as a result of large losses (Catastrophic Events)

Reduced capacity of larger risk on strata wordings

ASIC allowing larger property placement to be done on Industrial Special Risks policies

Independent Strata Review (John Trowbridge) – commissions disclosure review

In cases where OCs can not demonstrate any attempt to mitigate their risk, we have seen insurers increase their rates, implement higher deductibles, reduce policy coverage (removal of Office Bearers Liability and Defence costs covers) or simply decline to offer coverage.

Other factors contributing to increases in this sector include:

New valuations

Unexpected claims, despite not having claims for the last five years

Risk management practices and OC’s attitude in mitigating their risk as part of their duty in the ongoing maintenance of their buildings

Updated risk information – defects remedial works, maintenance and other (e.g., fire orders).

There is a continuing trend to seek coverage for plans being declined locally due to a failure to remediate defects or implement risk recommendations. Where this happens, capacity is required into Lloyd’s of London and plans can expect anywhere up to 300 per cent increases in premium. This will ordinarily involve the owners’ corporation raising special levies so as to meet the premium, and otherwise we have seen a significant uptake in premium funding allowing the premium to be paid in monthly instalments.

Plans experiencing defects, adverse claim histories or open claims typically remain with their incumbent insurer. There is little appetite for alternative quotes for such plans. However where proactive risk management, remediation and mitigation is apparent there will be appetite and alternative quotes – and in some instances the pricing will be far more attractive than the incumbent. In this regard, the approach we have taken with our Strata clients has returned positive results in the past 12 months. Details of our approach in this regard can be found here.

Over the course of the next 12 months, we expect that rate increases will continue between 10-15 per cent on average, however it will continue to be challenging to obtain competitive coverage for plans that exhibit the aforementioned problematic risk profiles.