Northern Australia Reinsurance Pool – A Watershed Moment for Strata

Politicians of all stripes have at various times in history flagged the need for the decentralisation of Australia’s population from the southern capitals of Sydney and Melbourne, and in more recent times, Southeast Queensland. Another hot button issue is of course housing affordability, and one which strata will play a long term key role in.

Part of ensuring that Australia’s North is populated, and its current population is serviced and treated adequately and fairly, is making sure it is affordable and viable long term to put down roots, start a business and raise a family.

After property costs and basics like food and utilities, insurance is the most critical expense for most households. Insurance costs, as outlined in the recent Deakin Report into Strata Insurance, are spiralling out of control in Northern Australia (the most Northern parts of Queensland, Western Australia and the Northern Territory), with the largest population centres in Queensland.

Northern Australia is a primary industry economic powerhouse, with critical industries like our defence force, much of our mining sector and agriculture based in the region.

But without a long term, stable population for the region these vital industries could face significant decline, or even eventual collapse. People will not move to places where their cost out of living is not in sync with their economic opportunities.

While an individual may not necessarily need a particular type of insurance, on a macro scale, communities need high rates of insurance to avoid catastrophe. This makes insurance an essential service like utilities or basic transport infrastructure.

As indicated by the recent Deakin Report, a multitude of factors have influenced spiralling insurance costs. Obviously, at its core, the issue is caused by unpredictable weather events such as tropical storms and cyclones. Cyclones and storms tend to ultimately have the effect of inundating strata schemes with water as well as causing physical damage.

Widespread poor building methods, coupled with an increasingly difficult insurance market has seen premiums soar. It’s clear that private insurers, who like any business need to be able to cover their costs and aim to turn profit, are extremely reluctant to enter the strata market, with its rigid directive that the common property be insured to full replacement value. In many places this has driven the discussion from one of affordability to availability.

When an essential good is unable to be efficiently and appropriately delivered by the market government must find a way. Without this, the consequences can be dire.

The recent Deakin Report indicated that reinsurance costs represented about one-third of the total premium cost in strata insurance policies. In addition to this, taxes including stamp duty also made up approximately a one third of the cost. It is also important to note that when it comes to strata insurance premiums, not only are purchasers of the product victims of double taxation but also of cascading taxation, with GST charged on the price of the premium after stamp duty. This means every increase in premiums is amplified by a surging growth in taxation on that premium. This of course only amplifies the difficulties felt by strata owners, managers and suppliers.

Treasury officials from the market group recently asserted that they are aiming for a 10 per cent overall premium reduction as a result of the implementation of the reinsurance pool. If achieved, this will be a massive impact given reinsurance costs only make up one-third of the total premium.

The state government also recently announced a $10 million mitigation fund for local councils in Northern Queensland to engage in mitigation. Whilst the issue of premium reductions is obviously critically important, this announcement of mitigation speaks to a broader more strata specific issue, namely, the availability of legally appropriate insurance.

Many bodies corporate in the North over the past few years have been increasingly unable to even procure insurance to the legislated standard of full replacement value in recent years. This has left managers and schemes faced with the additional expense of trying to find alternative insurance at the time when they can least afford it.

Part of increasing the availability of strata insurance in the North is ensuring that appropriate mitigation works can be undertaken by strata schemes. Building standards, particularly achieving a “Category 5” standard are critically important to ensuring insurers are willing to offer a policy to a scheme. The strata title resilience pilot program is aiming to do just this. Whilst the program is scant on detail at this point there is one fact which is abundantly clear to those who are involved.

Mitigation is a critical factor in encouraging insurers to insure buildings at any rate, a sensible insurer will not insure a building which is of poor construction and quality. Whilst the $40 million was a start, it is worth noting that the previous program ran out of JCU was plagued by a reluctance of schemes to participate and as well as the fact that roof cavities were not explored meant that the program achieved little in substance despite the positive intentions. The upcoming program hopefully has a great focus on roofs and water ingress.

SCA has long advocated for a reinsurance pool and now we have one on the way, which is a watershed moment for the strata industry and if done right, and in line with the recommendations in our submissions and others, potentially marks an opportunity to ensure a new era of economic prosperity.