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In this update, we share practical insurance insights from the quarter that’s been, and forecasts for the quarter ahead.
Following the Eastern Australian floods in March this year, the strata insurance market was again affected by a natural catastrophe in Q3. While it is still too early to determine the full extent of damage resulting from this latest disaster, an estimated 30,000 claims will be filed at a cost exceeding ~$500m.
Reinsurance treaties for strata and private real estate insurers tend to operate along calendar lines and are under considerable pressure after the bushfires of 2019-20, and COVID-19 in 2020. Thus, last month’s floods are likely to result in further rate increases across the market.
While insurers endeavour to take a long view of losses and profitability, the events of Q3 will negatively affect the rating environment across the property sector at large. At present, residential strata premiums are increasing at around 10% nationally, and we expect this to continue. Commercial property premium increases are trending ever higher, at between 15-20% for commercial strata, between 5-10% for non-strata commercial buildings, and upwards of 20% for industrial buildings.
While there are currently around eight insurance solutions in the residential strata space, there are only three competitive markets willing to quote the bulk of commercial strata risks. A drastic contraction in reinsurance availability, together with a lack of appetite to write higher risk commercial buildings has resulted in insurance premiums increasing by upwards of 20% for high hazard commercial spaces. Liability concerns in addition to poor housekeeping by tenants continues to contribute to the rising cost of commercial strata insurance.
Not all strata insurers are focusing on actively writing new business for buildings below $2m building sum insured; this is due to the excess/deductible being as low as $500 which makes this sector relatively unprofitable for insurers due to numerous small claims.
Some insurers in this small building category are looking to increase excess/deductible upwards to $1,000 or $2,000 to remove small losses caused by minor accidents and water damage claims. This is also seen as a prudent approach for many owners who will not incur large premium increases due to a multitude of small claims on their claims history.
Nationally, most strata buildings have a building sum insured between $2m and $10m, making this space highly competitive amongst insurers for “clean risks” (no claims history, no flammable cladding, no asbestos, of the right age, no defects, and no high-risk commercial tenancies). Clean risks may start seeing some reprieve after several years of rate increases. Owners can expect slight rate increases of <5%, or even minor reductions for some buildings. It is expected that buildings outside this category will continue to see rate increases in Q4.
Over Q4 we expect to see promising signs for owners of larger buildings over $10m building sum insured that are well managed and away from catastrophe zones. There will still be rate increases for buildings with poor claims histories, outstanding defects, or flammable cladding.
We anticipate more insurers will re-enter the Landlords’ insurance market to offer Rent Default that was impacted heavily due to the Government’s introduction of an Evictions Moratorium. This moratorium ended in March 2021 and to date, the rate of Rent Default and Hardship claims in the Landlords’ insurance industry has been stable.
To set minimum standards for rental properties and strengthen tenants’ rights, the Victorian Government enacted a raft of new rental regulations (132 in total) on March 29, 2021. Landlords must be aware of these changes, as they may need to action upgrades to properties as a result (which should be considered when budgeting for future property maintenance).
Within the reforms are a set of minimum standards that include the provision of:
Landlords must also ensure:
Under the changes, tenants may now install picture hooks, shelves, and child-safety devices without consent from their landlords. In addition, tenants can no longer be asked about previous rental disputes, or if they have ever had a claim on their bond.
Feel free to reach out to discuss your risk exposures.
matthew.henderson@honan.com.au
Read the Corporate Snapshot: FY21 Q3.
