Strata: built-in flaws

An independent review of strata remuneration recommends change to “perplexing practices”

By Wendy Pugh

With more Australians living in apartment complexes and plenty of issues affecting buildings and insurance, the last thing owners need is convoluted and opaque arrangements that leave the door open to questionable practices.

Strata is unusual given there are mostly two intermediaries – the broker and the strata manager – while client owners’ corporations, better known as body corporates, often have little understanding of who is being paid how much for what services.

Industry luminary John Trowbridge’s Independent Review of Strata Insurance Practices says that with almost no exceptions, all lot owners and other consumer representatives that have made submissions to his review have expressed dissatisfaction not only with poor disclosure but also with the convoluted nature of the current system.

“The optics of the system, irrespective of its merits, whereby brokers receive revenue from two sources (a commission from the underwriter and fee from the client), then remit a major part of the commission to the strata manager, are perplexing to say the least,” he says.

Models that are more straightforward also operate in the market, but the report recommends phasing out the most commonly used commission rebate/broker fee system, which Mr Trowbridge says presents inherent conflicts of interest.

Complex arrangements reflect strata growth and other changes, such as a New South Wales requirement for managers to obtain three insurance quotes each year. A buying system that started without brokers has changed to one where they are involved in some 80% of the market.

When brokers were first involved it was typical for them to rebate 10% to 15% of the commission to the strata manager and retain the other 5% to 10% for themselves, Mr Trowbridge’s report says.

But in the commission rebate/broker fee system, a practice has developed where the broker generally passes most or all of the commission to the strata manager and then charges a broker fee to the owners through the strata manager to cover its cost of services.

“In these cases, the broker fee is material and may be as high as the commission itself, which is typically 20% of the premium,” the report says.

As a result, total intermediary charges including commission are typically in the range 25% to 35% of base premium while some reach or exceed 40%.

The report looks at a couple of alternative models, including an arrangement where brokers dispense with the fees but retain sufficient commission for their own remuneration, while rebating a portion to the strata manager for referral or services rendered in support of the broker.

The strata managers would then need to go directly to the owners’ committee for any additional charges and could include fees for insurance services as part of their overall agreed services fees to the lot owners.

Another option, already in use in the market, is a single fee model with no commissions where the broker and strata manager agree on an aggregate fee to be approved by the owners, which is then split and allocated, while under a dual fee model separate fees involve “no behind the scenes sharing”.

Mr Trowbridge recommends that strata managers and brokers presently using the commission rebate/broker fee system prepare to make the transition to one of the preferred models.

He recommends that they prepare for the changes this year and implement the new arrangements through the 2024 and 2025 renewal cycles.

Mr Trowbridge acknowledges potential benefits put forward for maintaining current arrangements, including that disclosure initiatives may limit conflicts and should be given time to work.

A certain market stability has also emerged, and the current system delivers efficiencies in many cases in the appointment of brokers and in the collaboration between strata managers and brokers that generally deliver good insurance outcomes.

Ultimately, though, Mr Trowbridge takes the view that the conflicts of interest can’t be satisfactorily managed, and says steps should be taken to phase out the source of the conflicts, which is the “convolution of the commission rebate/broker fee system”.

The independent Trowbridge review is continuing. Strata cover affordability and available concerns are particularly a concern in Northern Australia, and issues more generally around transparency and consumer understanding of insurance remain firmly in focus.

The extent to which recommendations are adopted remains to be seen, but more clarity can only be a benefit as the industry looks to get on the front foot and address insurance issues affecting apartment owners – before governments and regulators decide it’s time for further action.