Over the past 12 months, inflationary pressures, natural disasters, supply chain disruption and rising re-insurance costs, have continued to impact insurer performance and market outcomes.

With the impact of these factors driving up insurance costs by up to 15-25%, we examine what strata committees can do about it.

We offer a structured approach to this challenge, exploring where there are genuine opportunities to reduce costs, and where taking the long view with a risk-averse strategy is required.

The complexity and cost of managing buildings has increased, making running an apartment building akin to running a small business, with multimillion-dollar budgets and costs.

For example, ‘smart buildings’ are emerging, and many offer concierge services, security and facilities management. The knowledge and expertise around these services require specialised knowledge to understand and oversee those services to make them run seamlessly.

The impact of inflationary pressures only adds to this cost. And the reality has been felt everywhere.

The layer atop this pressure is insurance. According to Samantha Reece, CEO of the Australian Apartment Advocacy (AAA), “When we drill down, it‘s to do with predominantly insurance costs, and also a number of the states like New South Wales, Victoria, and WA are now also required to do the 10 year maintenance plan.”

Insurance costs add a level of uncertainty and potential conflict for many strata committees, who may be reluctant to plan on and invest in essential repairs and upgrades, when the mindset is focused on short term cost reduction.

So, what’s a strata committee to do? How can you navigate this environment, and successfully steer your committees to ensure the right outcomes?

With insurance being one of the biggest strata costs, we’re providing advice and recommendations from McCormacks’ expert insurance broker.

BAC Insurance Brokers Guide To Strata Insurance 2023

McCormacks preferred insurance broker, BAC Insurance Brokers provide critical context and an overview of the insurance market in 2023.

Policy holders across most types of insurance are experiencing pricing increases, as insurers seek to achieve sustainable premium levels and offset the impact of many of the above noted pressures.

Beyond increased premiums, insurers also continue to maintain a conservative and risk averse approach with respect to their coverage appetites, with some risk classes experiencing decreasing limits, reduction in capacity being offered and even difficulty in obtaining coverage at all.

These conditions have led to standard premium increases being experienced on most renewals of between 15 and 25%, irrespective of the account performance.

The impact of building performance: Buildings with outstanding defects, contract works, adverse claims or other risk factors are experiencing considerably higher premium loadings and, in many cases, reduced policy terms, as insurers wish to closely monitor the progress and performance of the account.

A lack of insurance supply: This limits competition and market opportunity for high-value strata developments across Australia (+$70m Building Values), with only four of the specialist strata insurers participating in this space.

Note: Increased sums insured and fluctuations in the Emergency Services Levy rate applied by insurers will typically have a further compounding effect on outcomes (in addition to the standard increases mentioned above).

Summary Recommendations:

It is expected that these trends will continue throughout the forthcoming period and as such, premium increases should be anticipated and budgeted for future renewals.

With Australia experiencing a period of significant inflation resulting from the flow-on effects of the pandemic, the war in Ukraine and strong consumer demand, costs have risen by 10.3% annually.

The 4% rise in construction costs over the three months to September 2022 was the largest quarterly increase on record (excluding the period following the introduction of GST).*

The economic climate means it is likely Owners Corporations are underinsured if they have not undertaken a valuation in the past 12 months.

We recommend current valuations be obtained for all buildings to ensure adequate protection.

For more information and to help you navigate and better manage rising costs in the current environment, reach out to your trusted advisors at McCormacks.

*Source: BAC Insurance Brokers and CoreLogic’s Cordell Construction Cost Index for Q3 2022