Don’t Fall into the Protection Gap

The Insurance Protection Gap is the difference between the amount of insurance you have and the potential insurable financial loss of your property.

The increasing severity and frequency of extreme weather events in Australia means the protection gap is a potential problem for many strata communities. As the cost of claims and insurance risks rise, there’s a likelihood of underinsurance or non-insurance, creating a gap.

Why have premiums been under pressure?

Weather

Extreme weather events, like floods and bushfires, are increasing in frequency and intensity. So, it’s no surprise that the Bureau of Meteorology’s latest Annual Climate Statement showed that 2024 was Australia’s second warmest and eighth-wettest year.

As these events become more destructive, the cost of covering the risks increases, and customers feel the impact through higher premiums. However, premium increases have abated in the last 6-9 months, and new underwriting entrants are improving insurance availability.

Reinsurance

Reinsurance is a form of insurance that enables insurance companies to fund large losses beyond their financial capabilities, such as catastrophic events. The cost of reinsurance has increased globally due to extreme weather events, and insurers have passed these costs on to customers through premium increases. 

Economic factors

Increases in building and labour costs have been driven by a shortage of contractors, a high demand for materials, and soaring inflation in recent years.

Insurer selectivity

Insurers have become more selective in the risks they accept. They want customers representing a “good risk” – well-maintained properties with a good claims history. They’re less willing to take on buildings with known defects, cladding and other building issues.

Property demand

As the Australian property dream continues to grow, we’re building more houses, sometimes in risky locations near the ocean or rivers. Without investment in resilience and mitigation infrastructure, such as flood levees and building code improvements, these homes will be more susceptible to weather events, putting owners at unnecessary additional risk.

Avoiding the gap

Owners tempted to contain premium increases with lower sums insured or declining valuable additions available, risk beginning to fall into a protection gap.

The building sum insured may not match the actual replacement cost without a regular valuation. This gap leaves owners with the possibility of significant underinsurance, and they’ll be jointly liable for the shortfall if a major loss occurs and the insurance amount is inadequate.

An accurate valuation and appropriate sum insured reassures underwriters they’re getting adequate premiums to fund their losses and avoids additional increases to compensate for perceived underinsurance.

A qualified and skilled valuer assesses the cost of replacing the building using their knowledge of the industry and construction guidelines. They examine the construction and quality of the existing property and assess the cost and time required to replace it “as new”.

Bridging the gap

Having adequate insurance cover for a strata scheme extends beyond just the building sum insured.

As premium increases abate and the market stabilises, now is a good time to ensure you’re fully protected. We recommend reviewing the adequacy of your sums insured, including sub-limits that could be negotiated upwards to ensure they’re sufficient for additional covers, including loss of rent and temporary accommodation if there’s a long rebuilding process, for example.

Mandatory covers 

Public or General Liability

Public or General Liability is mandatory insurance for strata schemes under all state and territory legislation.

It provides the strata scheme with a defence, including legal costs, for claims made against it for third-party property damage, death or bodily injury.

Optional covers 

Office Bearers Liability

Strata schemes should have insurance to protect the Chairperson, Secretary, Treasurer and Committee Members from legal claims that may arise due to their actions while performing their official duties when representing owners and administering the day-to-day running of the scheme.

Legal Defence Expenses

Legal Defence Expenses cover is usually considered for matters where legal action relates to the day-to-day operation of the strata scheme, such as caretaking disputes, Tribunal applications and contractor disputes. It covers defence costs but not compensation, awarded costs, fines or penalties.

An insurer must approve any defence costs in advance before cover applies. It often has a capped annual policy limit that resets yearly at renewal, but only for new matters.

Machinery Breakdown Insurance

This is an additional cover that’s useful for schemes with machinery that may suffer damage beyond general wear and tear, which should be covered by a regular maintenance program, or where the included cover is insufficient due to the machinery’s age or size.

It’s generally relevant for multi-level or high-rise buildings that may have lifts, generators, sump pumps, car stackers, air conditioners, etc.

Don’t leave it too late

Insurance helps us recover when the unexpected happens. Never underestimate the importance of having a suitable insurance policy with adequate insurable limits across all types of cover.