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Key Takeaways from FY22?

PRICING INCREASES REMAIN 

Over the past year, strata insurance premium increases sat at around 15%, driven by a combination of insureds increasing the building sum insured, and insurers raising rates sector-wide. In January this year, the strata insurance market also witnessed the exit of a key insurer, with minimal new entrants expected over the year ahead. 

Landlord insurance within the real estate sector has settled after some turbulence in 2020 and 2021. The lockdown laws that impacted the short stay and holiday rental markets and fuelled rises in Rent Default claims throughout 2020-2021 have calmed, however the cost of landlord insurance has risen by ~25% over the past two years. 

CLAIMS INFLATION 

FY22 will go down as the ignition year for high inflationary costs in the insurance market, particularly so in the claims repair and supply chain space. Contractors, construction, and maintenance shortages have fuelled claims costs inflation estimates into FY23 by as much as 30%. This is mainly due to supply chain disruption for raw building materials and the influx of work caused by catastrophe events such as VIC’s summer storms and the QLD and NSW floods, which have also impacted insurers' profitability. Furthermore, supply shortages have severely delayed the average time to finalise a claim, increasing the demand for extended temporary accommodation and loss of rent, which is also contributing to the rising cost of claims. 

Key Considerations for FY23?

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Strata insurance price increases are set to continue in FY23 to balance the losses of FY22. Buildings with defects or recent claims will struggle to achieve multiple competitive quotes, and the insurance markets in Singapore and London are predicted to face greater demand for hard-to-place risks in FY23. Reinsurance costs will also increase for the strata and real estate sectors, set to be reflected in rising premiums. 

Higher building replacement costs have become another noteworthy topic in strata and real estate. Increases in building material costs are likely to mean building sum insured amounts will increase, while current inflation across the construction sector means the return to pre-pandemic pricing is unlikely. 

FLOOD & CYCLONE INSURANCE BECOMES MORE COMPLEX

Following recent flood events across QLD and NSW, the options for insurance in flood-prone areas will continue to pose affordability issues in FY23. The situation needs to be addressed by State and Federal governments who can implement risk management strategies and ensure further town planning in flood-prone locations is managed appropriately.

The northern Australia Cyclone Reinsurance Pool continues to provide little reassurance around strata or home insurance savings. Up to a quarter of ‘low-risk’ homes and strata locations in northern Australia may see premium increases in an effort to subsidise higher-risk properties in these regions. It is clear that the Government’s consultation with the large insurance companies in northern Australia, the Insurance Council of Australia, and NIBA is critically important, as the complex situation should be guided by key insurers and the two industry groups who possess the knowledge and capabilities to implement future solutions.

Any industry trends you can see rising/developing over the remainder of FY23?   

PROPERTY MANAGEMENT: BODILY INJURY CLAIMS ON THE RISE 

Real estate agents may face a tougher sales environment in FY23 due to rising interest rates, with agents advised to review their fixed costs expenses as top-line growth is set to plateau. A review of real estate corporate insurances such as Professional Indemnity (PI), Cyber, and Management Liability insurance is highly recommended as many agents are likely to have gaps in coverage. 

The sector has recently seen a subtle but significant change to the limits of insurance provided for Bodily Injury cover. Bodily injury claims (slips and trips, etc.)remain the dominant claims cost in real estate. Many agents are not insured for this risk under their PI or Business Liability insurance (and pay lower premiums because of the absence of this coverage) and have bodily injury exclusions on their PI policies. Real estate agents should query this at every renewal. 

Commercial real estate agents with high percentages of leasing; particularly those managing large shopping centres, are facing fewer insurance options as bodily injury claims have impacted the sector with claims of up to $1m in recent times. 

DEFECTS & STRUCTURAL BUILDING ISSUES 

Fire, structural defects, and the quality of building materials will dominate the strata narrative in FY23. Headwinds in the construction sector have the potential to further exacerbate poor building standards as builders look for cheaper materials to regain profitability. Just one or two insurers are consistently providing quotes for defective buildings. Meanwhile, many insurers in Australia have gone too far in their assessment of risk in buildings, with defects and taking unreasonable declinature stances. Don’t miss our recent article about managing building defects to assist strata managers and body corporations in the lead-up to renewals. 

Reviewing the adequacy of Builders Warranty insurance, and consideration of Decennial Liability insurance* will be hot topics requiring firm guidance from the state bodies responsible for protecting consumer rights. Many insurance professionals are doubtful that insurers will be willing to underwrite the risks of decennial liability. Initiatives like the Builders’ Warranty state schemes are therefore predicted to be theological solution. 

*A form of insurance taken out by a developer or builder for a period often years following the completion of a building, in favour of future building owners. Decennial liability insurance is designed to cover potential costs incurred by an owner in the event the building totally or partially collapses, or the building contains structural defects that affect its stability or safety. In NSW, this form of insurance is being explored to provide owners of residential apartment buildings with greater consumer protections in the event of major defects.

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