The Strata Insurance Market Explained

Understand the Strata Insurance market landscape and how to achieve the best outcome for strata properties

The strata insurance market is always an interesting place. This guide provides you with an insight into the factors that shape the market and a realistic outlook for strata insurance premiums. It delves deeper into key areas of insurer’s focus, so you can be well prepared for renewals.

The significant weather events and catastrophes that have occurred in recent years and the ongoing effect of COVID plays a major part in what to expect going forward, including:

• The potential for underinsurance of strata properties without a recent valuation
• The limited ability to obtain multiple quotes and reduced availability of insurance cover
• Additional information requirements introduced by insurers on renewal, especially for defects
• Higher standard excesses and an increase in imposed excesses
• Expected premium increases of for standard risks

Strata insurance premiums

Strata insurance premiums have surged over the last couple of years and it doesn’t look like they will slow down in the near future. Some of the contributing factors are:

• Below market-rate premiums in previous ‘soft market’ conditions have led to underwriting
  losses with the total claims paid amount very close to the total amount of premium collected
• Increased reinsurance costs
• Floods, bush fires, and cyclones have caused catastrophic damage to businesses and private properties
• Fewer speciality strata insurers in the market, meaning there is less competition and those that remain have narrower risk appetites
• Increases to the average cost of claims due to inflation, labour shortages, and delays in the
  supply of materials

Premium outlook

• On average, Strata Insurance policies are currently experiencing premium increases for properties with no outstanding claims or defects
• Strata properties with identified issues will see substantially higher premium rate rises because insurers must price strata property insurance to reflect the risk and characteristics of the building
• An increasing number of strata properties are classed as ‘very high risk’, and carry high repair
  costs – this can be due to location, age, design and construction methods
• Claims history, maintenance problems and the way in which a building is used can also affect the risk profile of the property, subsequently impacting the premium rates

Cost of natural catastrophes

The Insurance Council of Australia (ICA) released two significant reports in 2022 on natural catastrophes. A summary of the key findings of these reports was published in Insurance News.

The following graph¹ by the ICA shows the huge cost associated for just one of the catastrophic events in Queensland and NSW in 2022.

Click here for more details from the ICA.

Availability of insurance cover and risks under the microscope

There is a reduced appetite for certain risks and some limitations on capacity for larger sum insured levels with some strata insurers.

Underwriting guidelines have changed, resulting in limited availability of cover for properties with
defects of any kind. Where cover is available, short term renewal periods are being offered by insurers if defects have not been rectified within acceptable time frames. Underwriters do not look favourably upon inaction by owners to address defects, and in-depth questions must be answered and supported with proof of action to provide cover.

In addition to stricter underwriting of defects, all underwriting questions require satisfactory answers and often supporting documents. A response of ‘unknown’ is no longer accepted and may result in limited or no cover being offered. Insurers are underwriting very closely and requesting more information for strata properties where there is:

• Non-disclosure of construction materials (low and high risk)
• High-risk or ‘unknown’ commercial occupants
• High-frequency claims and/or open claims
• A high percentage of lightweight materials, Expandable Polystyrene Sheets (EPS) and
  Aluminium Composite Cladding (ACP) risks

Defects

• All defects must be reported to the insurance broker and/or insurer, as per Duty of Disclosure requirements
• Insurers require defect rectification works to be acted upon promptly
• If defect rectification is not achieved, insurers must adhere to their underwriting guidelines which can result in premium increases, greater deductibles (excesses), special terms and conditions, short termed policies and the potential of non-renewal

Excess increases

An insurance excess is a pre-agreed amount that the owners corporation has to pay towards the overall cost of an insurance claim. Your insurer will then contribute the rest of the claim up to the cover limit.

• A standard excess of $2,000 is being applied by most insurers
• Properties with a high frequency of claims are likely to incur imposed excesses higher than standard
• High-risk properties, including properties requiring defect rectification, are also incurring higher than standard excesses
• Properties where ACP and highly flammable construction materials exist continue to have imposed excesses for claims

Additional information requested on renewal

We strive to obtain multiple quotes as part of the renewal process. The following additional information is now required to obtain a quote and update your current insurer to obtain renewal terms:

• A current building valuation
• An update on commercial tenancy/occupation/activities
• Full disclosure and updates with respect to building notices and building orders
• Building defects require an updated scope of works and details of any rectification works or reports
• Material assessment reports with respect to the disclosure of construction materials
• Product names and percentages of all external building materials (for renewals and new developments)
• Fire engineer reports
• Cladding rectification updates and remediation plans
• Proof of enacting insurer risk recommendations and requirements, especially those of a critical nature
• Asbestos reports and registers as per legislative requirements

The importance of valuations

Strata legislation in each state and territory requires the Owners Corporation² to insure the strata property for the full replacement and reinstatement value. Insurance is mandatory to protect their property in the event of any major disaster or loss. The insurance valuation and building sum insured should include the cost of removal of debris, professional fees and an allowance for cost escalation over a period of time.

In most states and territories, there is a requirement under the strata legislation to obtain a valuation at least once every five years. It is recommended that the valuation is undertaken by a qualified professional, such as a Certified Practising Valuer accredited through the Australian Property Institute.

Even though insurers often increase the building sum insured by a set percentage each year on renewal, strata owners are ultimately responsible for instructing the insurer on the required insured amount.

CHU Underwriting Agencies released the graph below highlighting how the cost of construction has risen dramatically and well exceeds CPI, particularly post COVID. When you overlay CHU’s actual sum insured profile from across its strata portfolio, it is clear that sums insured are not even keeping pace with the CPI% in the graph, let alone the construction pricing index.

The current shortage of building contractors combined with the dramatic inflation in construction costs may mean that a strata property could be underinsured if it hasn’t had a valuation in the last 12 months. It is worth highlighting that any shortfall in the cost to rebuild the strata property in the event of a total loss will be the joint responsibility of all owners.

Building cost inflation vs CPI vs Sum insured changes at CHU to June 2022

Annual change %³

Achieving the best Strata Insurance outcome

As a broker, our recommendation will not always be based on price. When comparing quotes and policies, it is important to consider the product inclusions, excesses/deductibles, exclusions and cover limits for each insurer. Please contact your Whitbread insurance broker if you would like to know more about the strata market or to discuss a particular risk in greater detail.

T: 1300 424 627
E: info@whitbread.com.au

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1. Updated as at January 2024. ↩︎
2. Refers to the Owners Corporation, Strata Plan, Body Corporate and Community Title. ↩︎
3. Source: Australian Bureau of Statistics, reference period June 2022. ↩︎