Strata Unit Underwtiters (SUU) welcomes the opportunity to make a submission to the NSW Government s Strata and Community Scheme Review.

Transcription

1 Strata header 1 20 November 2012 Strata and Community Scheme Review Fair Trading Policy PO Box 972 PARRAMATTA NSW 2124 Via policy@services.nsw.gov.au Strata Unit Underwtiters (SUU) welcomes the opportunity to make a submission to the NSW Government s Strata and Community Scheme Review. SUU is one of Australia s leading strata title insurance providers, with products sold nationally. SUU is a wholly owned subsidiary of CGU Insurance, one of Australia s leading general insurance providers, with products distributed primarily through a network of more than 1,000 intermediaries, such as brokers, agents, motor dealerships and financial institutions. CGU is also a leading provider of workers compensation services in Australia and is a leading provider of residential strata title insurance through SUU. If you wish to discuss any matter raised in our submission, or obtain further information, please contact Sean Sampson, Senior Corporate Affairs Adviser, on (03) Yours sincerely Brad Robson National Manager, Strata Unit Underwriters

2 Strata Unit Underwriting Agency Pty Ltd Submission to the NSW Government s Strata and Community Scheme Review 20 November 2012 Table of Contents Introduction.. 3 SUU s interest in the discussion paper 3 Executive Summary 3 Frequency of valuations. 4 Extent of strata insurance cover... 4 Options to alter excesses.. 5 Public liability minimums 6 Conclusion 6 2

3 CGU Insurance Limited Submission to the NSW Government s Strata and Community Scheme Review Introduction This submission to the NSW Government s Discussion Paper on Strata and Community Title has been prepared by Strata Unit Underwriters (SUU), a wholly owned subsidiary of CGU Insurance Limited (CGU), one of Australia s leading general insurance companies, and part of Insurance Australia Group (IAG). CGU distributes its products through a network of more than 1,000 insurance brokers, authorised representatives and strata managers, and we partner with more than 100 major financial institutions. CGU is the largest provider of insurance to Australia s regional and rural communities, one of the nation s largest providers of workers compensation services and a leading commercial insurer. SUU s interest in the discussion paper SUU distributes insurance products underwritten by CGU, and is one of Australia s leading providers of residential strata title insurance. Through participation in this discussion paper, SUU hopes to assist the NSW Government in developing a better understanding of the operation of residential strata title insurance in Australia and the factors that determine how a premium is established. This submission is concerned primarily with issues discussed in Chapter 4 of the discussion paper, and specifically those points raised under Insurance on pages 43 through 45. Executive Summary Residential strata title insurance plays a significant role in the lives of many residents of New South Wales. As noted in the discussion paper s opening comments by Anthony Roberts MP, in excess of 70,000 schemes exist with an estimated $350 billion in total assets, with both numbers expected to increase over coming decades. As the schemes and value of assets continue to grow, so too will the importance of affordable and appropriate insurance. With this in mind, it is important to ensure the policies offered are both appropriately priced while also providing an appropriate level of cover. Residential strata insurance is a unique offering, in that it is legislated cover for Bodies Corporate in every State and Territory. It is also unique in the breadth of cover it provides. While much media and community commentary has recently focused on claims arising from cyclones and storms, residential strata insurance provides cover that is much broader than just protecting the material damage risk of building and common contents. A typical residential strata insurance policy will provide cover for expected risks such as fire and storm damage to buildings and contents, as well as cover for liability claims against the strata s Owners Corporation, claims against the committee, personal accident on the strata premises and other forms of insurance protection for the Owners Corporation. Due to the complex nature of strata insurance and the many aspects of cover it provides, underinsurance is a common issue. Buildings are often left undervalued and limits for liability cover can at times be low when compared to likely costs. 3

4 The discussion paper explores options that may allow strata premiums to be reduced. SUU s submission will explain the rationale that leads to premiums being set at the price point they are, and the risks in cherry-picking elements of cover to retain - and elements to discard. Frequency of valuations Underinsurance is a widespread issue and is not restricted to strata insurance. While legislation prevents Body Corporates from not having insurance, it can be difficult for an appropriate level of sum insured to be established without regular valuations. At present, there is a legislative requirement for strata schemes to be insured for the full replacement value but no direction given on the frequency of formal valuations. A practice adopted by some Owners Corporations is to index their sum insured value at the time of renewal by an arbitrary amount. The sum insured is then accurately updated when a formal valuation is conducted. While not a 100% accurate method, this indexation provides the Owners Corporation with some assurance that any increase in value in their property will be met by the existing policy. However, underinsurance still occurs. If the time period between valuations is to be reviewed, SUU would endorse a frequency of every three years. Further, we would support the implementation of some form of formal indexation to provide protection to the sum insured for the years between valuations. An example of the financial implications of underinsurance are clear with Property A. In 2005 a formal valuation determined a sum insured of $4.04 million. A 5% indexation was applied to this figure so that in 2010 a sum insured value of $5.16 million was listed on the policy. A formal valuation was conducted in 2011 which determined the sum insured should in fact be $7 million,meaning the property was underinsured by $1,844,000. As the scheme comprised of only seven unit owners, they may have been liable to share in the shortfall should a total loss event occur. This would amount to $263,428 each versus the relatively small cost of obtaining a more frequent valuation. Extent of strata insurance cover Strata insurance policies are complex products. Whereas a home building policy will cover the bricks and mortar of a residence, a strata policy also provides cover for liability claims against the Owners Corporation as well as financial support for owner occupiers and investors should the property require evacuation. These additional aspects of the policy are often not considered as necessary until called upon. The discussion paper raised the 2009 gas explosion in Bondi Junction. As a result of this incident, all occupants of the building were evacuated and even when emergency services had assessed the area, there were some residents who were still refused re-entry. The ongoing costs associated with temporary accommodation and loss of rent suffered by owner occupiers and investors were all met by the Owners Corporations strata policy. Had this facet of the policy been voluntarily excluded at the time the policy was purchased, the ongoing costs would have been borne by either the owners, or by the Owners Corporation itself. While the scope of cover does vary from State to State, this typically relates only to the boundaries of common property. 4

5 SUU believes the current scope of mandated cover in NSW is appropriate and should not be reduced. To reduce the scope or allow an Owners Corporation to select the elements they want cover for would lead to higher incidents of unit owners being underinsured and possibly holding no insurance at all. Options to alter excesses A common feature of motor policies is the ability to reduce the overall premium by increasing the excess payable. While this works well for motor policies, increasing the excess has little impact on strata policies. An excess is designed to allow the insured to self-insure against expected losses (high frequency and low severity). In relation to strata insurance, it allows either the unit owners or the Owners Corporation to pay for small cost repairs without the requirement to access insurance. This practice assists in keeping claims lower, but overall it does not reduce the total cost of claims by any considerable margin. A premium is not an arbitrary number. It is the culmination of complex and detailed statistical data that reflects the cost of offering cover for the specific risk in a specific area. Looking at a premium, the total amount is made up of several key portions, namely: Working losses, Large losses, Natural peril events (catastrophes), Reinsurance, Administration and distribution costs, Government levies and taxes, and Profit margin Over the past twelve months, SUU has been steadily increasing premiums as a result of increased costs of business. At the same time, excesses associated with these policies have also been increased in an attempt to reduce the number of smaller, maintenance type claims being lodged. An example of a maintenance type claim is a water damaged ceiling resulting from a leaking roof which is repaired through a claim on the Owners Corporations strata policy. While the cost to repair the ceiling may be, for example, $300, the policy excess may be $250 yet the Owners Corporation would lodge a claim solely to reduce their overall cost by $50. This type of claim could easily be avoided through a more vigilant maintenance program rather than waiting for the problem to escalate, necessitating an insurance claim. If the excess is increased, this creates an increase in exposure for the unit owners. For example, if the excess is increased to $5,000, any required repairs under this threshold would need to be met by the Body Corporate s sinking or administration fund, and then replenished. This financial pressure is increased significantly if a single unit owner is held liable for any particular incident and must fund the excess payment themselves. This scenario would repeat itself if multiple insurance claims or self-funded repairs are made throughout the year. Any benefit that may be gained by increasing the excess to reduce the premium would be made void if a series of maintenance issues or small repairs were needed which failed to reach the excess threshold. 5

6 For this reason, we recommend maintaining the current affordable level of excess as it places less financial burden on the Owners Corporation to meet the costs of any ongoing incidents. Public liability minimums The current legislated requirement of strata schemes to hold $10 million in public liability cover has not, in our experience, kept pace with the demands and requirements of the bulk of our policy holders. The majority of our policy holders have in recent years have elected to purchase $ 20m public liability cover. In order to afford Owners Corporations the best possible protection and to keep pace with inflation and the potential for claims, SUU recommends the minimum prescribed limit for public liability cover be increased to $20 million. This increase would assist in avoiding uninsured losses and would reduce the exposure to financial hardship that would be experienced by the individual members of the Owners Corporation should a gap eventuate between the extent of their cover and what they are deemed liable for. A stark example of this can be drawn from a recent incident in Perth where a group of medical practitioners were injured when a balcony collapsed. The Owners Corporation was insured for $10 million of liability cover but the actual costs have far exceeded this limit. An Owners Corporation is unique from any other entity in that it has an unlimited liability This in effect means any costs above the insured $10 million liability cover will need to be funded directly by the unit owners via special levies. Conclusion SUU, and more broadly CGU, are committed to offering appropriate insurance solutions at accessible prices. As an intermediated business, we endorse the use of insurance brokers and advisers to ensure a customer ultimately purchases a policy that provides an appropriate level of cover. If consumers are left to cherry-pick elements of a policy it will inevitably lead to incidents of Owners Corporations being underinsured, or worse, uninsured. While acutely aware the pressure an increasing premium can cause, SUU is cautious of implementing measures such as increased excesses without first exploring the potential consequences for the Owners Corporation should they find themselves with a repair bill in the thousands of dollars. Strata insurance is an important facet of an urban lifestyle, be it a retiree moving to a scheme in a coastal town or an executive living in the CBD. It is important to ensure that appropriate insurance is in place to safeguard the Owners Corporation against possible claims and potential financial ruin. SUU and CGU look forward to continuing discussions with the NSW Government on methods to simplify strata insurance and to ease the concerns of policyholders. 6