Building trust

Maintaining confidence in the critically important strata sector was among key issues discussed at an Insurance News seminar

By John Deex

New South Wales strata and property services commissioner John Minns has a clear message: strata has a perception problem, trust must be regained, and the insurance industry can play a vital role.

Speaking at Insurance News’ half-day strata seminar in Sydney on May 30, Mr Minns (pictured above) focused on the people behind the headlines, and the pain that can be caused by reluctance to carry out critical maintenance.

“Trust in strata, and the people involved, has suffered a significant decline since 1961 [when the concept of strata was first introduced],” Mr Minns told attendees. “That’s due to many factors, including complexity, competence and, of course, cost.”

Mr Minns flagged escalating cost-of-living pressures, ageing infrastructure and “on occasion, poor or weak professional advice”. He also addressed a lack of transparency and called on the industry to “please stop defending [conflicts of interest] in the public domain”.

“No one is actually claiming professionals should be paid less for delivering services in strata communities,” he said. “People ultimately don’t care if you are well paid. But they do care that you act in their best interests.

“We cannot afford to confuse minimum standards of disclosure with true transparency. Let’s be honest, let’s sell value – let’s sell value really well.”

The sold-out half-day seminar was attended by more than 100 people. The major sponsor was CHU, with Morse Building Consultancy sponsoring the coffee cart.

Expert speakers addressed key issues including market trends, climate risk, building defects and affordability challenges.

Here is a summary of each session.

Growth trends in strata insurance

Kimberley Jonsson, chief executive of CHU

Ms Jonsson made the point that while strata takes up a small percentage of the overall general insurance market in Australia, “we get a lot of noise”, and that’s because 3 million people live in strata title properties.

Ms Jonsson said that “some of the things we’ve been told about [strata insurance affordability] might not be right”.

A poll of the audience found that most expect annual strata insurance costs to sit between $1000 and $1500 – while the average premium per lot across the capital cities of Australia is $954.

However, Ms Jonsson said median premiums have increased by 82% in the past five years, and only 15% of those exposed to flood choose to purchase that cover, mainly for cost reasons.

She said that for a long time, premiums did not keep pace with construction costs, and a “catch-up” was required.

“The good news is that we have caught up … and rates are now plateauing. The truth is, strata is actually the answer to some of the affordability issues that we have.

“Because we know that urban sprawl is headed out into floodplains, and the way to stop that is with urban infill.”

Responding to nature’s wrath

Sharanjit Paddam, principal for climate analytics at Finity Consulting

Mr Paddam told attendees the biggest unknown with climate predictions is “what we are going to do to reduce emissions”.

He said tropical cyclones are likely to remain stable in frequency but increase in severity. More importantly, they are likely to track further south.

“That is of extreme concern, because we kind of stopped with the building standards to protect against cyclones somewhere around Bundaberg.”

Mr Paddam said there is some debate about how flood risk will develop as the climate changes, but most scientists now agree it will worsen. Storm and hail risk varies across the country, but scientists are much more certain about bushfire risk, which will increase.

Mr Paddam talked about uninsured risks such as coastal erosion and inundation, and worsening heat stress, and the impact these could have on strata in future.

“There is, frankly, an issue of liveability, never mind insurability or affordability, facing some parts of Australia.

Unravelling affordability (panel session)

Tyrone Shandiman, managing director of Strata Insurance Solutions, and chair of the Australian Consumers Insurance Lobby

Jonathan Cohen, principal at Taylor Fry

Michael Giansiracusa, chief executive of Whitbread Insurance Brokers

John Trowbridge, insurance industry specialist and author

Mr Cohen told the audience increases in premium need to be interpreted along with cost pressures that residents are feeling elsewhere, and a comparison with other parts of the country.

For example, he said strata premiums in north WA are three times as much as areas outside northern Australia.

Mr Shandiman pointed out that while the averages may look fine, there is still an affordability issue at the extremes. “And while it may only be 1% or 2%, it is still a problem. And it is still, in our view, a market failure.”

From the broker’s perspective, Mr Giansiracusa discussed the impact soaring construction costs and rising asset values have had on claims and premium costs, as well as the effects of defects and climate.

Mr Trowbridge, who has written a comprehensive report on strata practices, said conflicts of interest need to be removed by intermediaries, and recent scrutiny on the industry should accelerate moves towards “a more open and rational” arrangement.

Mr Shandiman agreed, saying that until now “too many people have remained silent on the issue”.

Regulatory developments impacting the assessment of building risk

Bronwyn Weir, managing director of Weir Legal & Consulting

Co-author of the Building Confidence report following London’s Grenfell Tower disaster in 2017, Ms Weir told attendees the situation with defects is “pretty dire” and “not a lot is changing”.

Flammable cladding is a symptom of a wider problem, she said, and after six years no government has implemented all her report’s recommendations, despite lobbying from groups such as the Insurance Council of Australia.

But what cannot be quantified in such reports is the true cost to owners.

“Aside from the financial costs, the emotional stress to owners is astronomical,” she said.

“And I have spoken to a number of these owners from some of the well-known buildings in this state, but also in other jurisdictions.

“It is extraordinary and heartbreaking to get off a phone call from these people who are dealing with this and having it pervade every part of their life.”

Countering maintenance reluctance

John Minns, NSW strata and property services commissioner

Mr Minns told the audience that when strata was set up in 1961, self-governance with minimal regulatory oversight “kind of worked”.

“But as complexities increased, and buildings have aged, we simply haven’t evolved as effectively as we should to deal with the level of change that’s out there.

“The problems in strata aren’t going to fix themselves. The risks are increasing. And business as usual is no longer going to be a viable option.”

Mr Minns said reluctance to carry out vital maintenance can have terrible consequences, using the example of a couple who moved into a top-floor apartment in Sydney in 2019.

The owners’ corporation refused to act on a legal obligation to fix a water leak because, he said, a cost estimate of $200,000 was “not palatable”.

By 2023 the rectification cost had soared to between $1 million and $2 million. The couple was forced to live on the roof in a tent, and last year their son took his own life.

“There’s no winners in these types of stories. And unfortunately, we’re not looking at this as being an isolated outlier.

“Making the connection between maintenance and repair of common property and future insurability premium costs and conditions of coverage is a really critical responsibility of strata sector professionals.”