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The “perfect storm” continued to dominate the strata insurance market with high inflation, labour shortages, and the devastating South-East Queensland and Northern New South Wales floods (which totalled a record-breaking $5.81 billion in claims) all contributing to increasing premiums.
As we near the end of FY23, it is worth acknowledging that this year has been yet another challenging one for the strata and commercial real estate insurance industry. Moving forward, it is the reinsurance costs from major strata insurers that will likely have the most significant impact on the market during FY24.
The strata market has continued to see insurance premiums increase by approximately 15% nationally on standard risks where insurance brokers are remarketing risks with a broad range of insurers. Insurers are viewing the regions of southwest Sydney, coastal areas of northern NSW, and southern Queensland as under-priced following recent losses caused by the storms and floods, resulting in premium increases of up to 40% in these areas.
Insurers have been persistent in their pricing corrections in regions impacted by catastrophes, similar to trends in alpine and bushfire-prone regions two years ago. However, the corrections are modest compared to the premium increases in northern Australian cyclone-exposed regions five years ago. Buildings exposed to natural peril such as cyclones, flooding, and bushfires are seeing catastrophe premium loadings continue to rise as international reinsurance markets balance their risk exposures and improve their long-term profitability.
Due to the rising costs of claims, labour, and materials, strata insurers are increasing their standard excesses in both the strata and home insurance sectors. In fact, many standard strata renewals now have excesses of $2,000, while larger buildings over $50 million are seeing excesses of $5,000 or more.
Building defects, cladding and high-risk activities in commercial and industrial strata remain hot topics for the industry with many insurers increasing the subjectivities and conditions that are applied to renewals if controls and risk improvement recommendations have not been implemented. In severe cases where defects, cladding or high-hazard activities are fundamentally impacting fire safety or building support integrity, certain exclusions and high excesses are being applied more frequently.
Australia’s inflation rate (7% in April 2023) is tracking below what the Australian Bureau of Statistics (ABS) is reporting for many costs of building materials and trades labour. This has a knock-on effect on strata and real estate claims repair. We are seeing some improvements to the supply chain, and there are signs that the recent decline in housing construction may help to stabilise the labour shortage and building material costs over the next 12 months.
The Quality of Advice Review was presented to the Federal Government by Michelle Levy earlier this year and maintains the recommendation that The Corporations Act provides exemptions to the ban on conflicted remuneration for benefits given in relation to a general insurance product. The review also recommends greater transparency in commissions for residential strata products and other retail products.
The Quality of Advice Review was instigated after the Royal Commission into Financial Services and ran in parallel to other industry-initiated reviews looking at remuneration practices in specific sectors. The Strata Community Association (SCA) has stated it is supportive of insurance brokers and strata managers receiving insurance commissions and that the remuneration is justifiable. The National Insurance Brokers Association (NIBA) has broadly confirmed its support of insurance commissions within the industry. Honan is of the view that strata managers and insurance brokers are integral to the coverage stability and long term downward pressure on premium pricing via greater choice and competition.
It is encouraging to see some insurers re-entering the strata insurance market as is evident in the return of some Lloyds of London security into two binders. Lloyd’s security remains highly disciplined, meaning the premium volume of buildings being written into Lloyds for strata remains quite small. Most newer binders (and some older ones) in strata are focused on small to medium sized buildings for the time being, and there is minimal appetite from new insurers to write risks with cladding, defects, or high-risk hazard commercial and industrial activities.
Premium pricing trends
We are forecasting insurance pricing increases of 15% - 20% for residential strata and approximately 20% for commercial strata properties in FY24. Inflation will drive up reinsurance costs by around 20% over the remainder of the 2023 calendar year. Also concerning is the upward cost pressure on building materials and trades labour due to supply chain disruptions, labour shortages, and increased construction costs – all of which are contributing to the rising cost of claims.
Reinsurance challenges
The major challenges for the strata insurance market are the increase in claims and the associated costs of reinsurance. This has been driven in part by natural catastrophes such as the 2022 floods and 2020 bushfires. Also of note is cyclone Gabrielle in New Zealand - the worst storm in over two decades. This will impact the Australian property insurance market due to international insurers pooling New Zealand into Australian reinsurance territories and vice versa.
Earlier this year for example, insurer IAG reported that reinsurance costs for catastrophe events have increased by 20% - 25% and retention of their excess has risen, meaning insurers are retaining more risk and therefore increasing their own excesses.
The industry will be watching insurer QBE’s decisions on reinsurance pricing in FY24 as an indicator of the broader strata insurance market trend. The big three strata insurers (QBE, Chubb and IAG) represent the aggregate capacity of approximately two-thirds of strata’s premium via their reinsurance schemes and their broad appetite for large risks, cladding, defects, and claims impacted buildings in commercial and industrial strata. This capacity cannot be replaced overnight if there is any significant change in their risk appetite.
There is limited appetite among insurers supporting the Professional exposures of the Real Estate sector.
Several real estate insurers have an automatic decline or restricted coverage for Professional Indemnity insurance due to the rise in claims, particularly in the residential and property manager space. Agents with a large percentage of their turnover derived from property management services or other branches of the industry such as off-the-plan sales or valuations services are attracting higher increases and deductibles from a smaller pool of insurers with an appetite for these risks.
Exposures covered under Management Liability continue to rise, particularly that of Employment Practices Liability (EPL). Dual Australia reports that EPL accounts for 40% of all Management Liability claims, which is a significant rise. This trend reflects ongoing changes in the employment sector, including updated regulations and employee expectations, which employers may struggle to meet. Additionally, there is a growing trend of legal action regarding alleged harassment, bullying, and unfair dismissal.
Small and medium-sized enterprises (SMEs), including real estate agents, continue to be a prime target for cybercriminals who are becoming more sophisticated in their methods. Flexible working models and the use of mobile devices for work purposes outside of secure networks have further increased the risk of cyber threats to SMEs. The majority of cyberattacks occur through phishing or the compromise of employees' email accounts, often via clicking on links. Businesses must be proactive in protecting their networks, devices, and data and educating staff about cyber security to help prevent these types of attacks from occurring. Find out more in this simple guide to combatting cybercrime.
New entrants in the residential landlord insurance market are fuelling competition after a period of rate correction through 2020-2022. Clients can still expect increases upon renewal of around 5% -10% on average, however, they may have access to a wider pool of insurers.
The commercial property market is also starting to show signs of a shift in favour of clients. While premiums for Property Insurance are still assessed on the level of risk presented by tenants and their activities, and some general insurers are hesitant to insure high-hazard occupants, the market is opening up to new players.
The emergence of new underwriting agencies specialising in the hard-to-place property market is creating opportunities for property owners and managers to obtain coverage where it was previously limited and driven by the London market. These specialist agencies can offer innovative solutions to property owners who have been declined coverage by traditional insurers due to the perceived risks associated with their properties.
