THE EYE OF A PERFECT STORM

In the strata and landlord space, the issues that we’ve been facing across many categories of insurance are incredibly prominent – and have created something akin to a perfect storm. Rising inflation? Tick. Catastrophic weather events? Tick. Supply chain difficulties, labour shortages and scarcity of materials? Tick, tick, tick.

And as a result, claims costs have increased, resulting in upward pressure on premiums – causing concern for brokers and customers alike.

“There has been a lot of attention of late on inflation, and as we see interest rates on the rise and the cost of living increasing, we are also seeing the supply chain costs, including labour and materials, on the up and up,” says Andrew Robson, General Manager of SUU.

“As well as inflation, we’re contending with increased costs in re-insurance, which is a global market impacted by international events as well as local events, and both impact premiums. This weather event frequency, intensity and volatility, both locally and globally, is driving strong increases in reinsurance costs. This, coupled with the increasing average claims cost, is putting pressure on portfolio performance resulting in premiums rising year on year.”

The Underinsurance Trap

Of course, when belts are being tightened, insurance is often the first thing to be reviewed. And for strata insurance and landlord insurance policyholders and their brokers, it’s essential to review sums insured. After a number of years of serious property value growth followed by an inflationary environment in which the cost of goods and services (including tradies) has increased significantly, it’s likely those sums insured aren’t at the level they should be today.

Kimberly Jonsson, CEO at CHU, says, “As a result of the market forces, one of the key issues that has arisen is underinsurance.

“Before the pandemic, annual percentage changes in building sum insured (BSI) amounts at CHU had remained roughly in line with changes in CPI and actual building costs. However, building costs have been growing rapidly, creating an ever-increasing gap between building sums insured, and the actual costs of repairing or rebuilding, leading to underinsurance.

Jonsson says that, according to their data, a surprising number of clients have maintained their sum insured.

“CHU has seen this growing concern in the past 12 months with 42% of customers maintaining their current sum insured and only approximately one-third adopting the suggested indexation on their sum insured,” she says.

“The likelihood that owners will find themselves underinsured is rising and will continue to rise as we continue to see inflationary pressures, material shortages and labour shortages tipping the balance of supply and demand of repair and maintenance products and services,” says Jonsson.

Underinsurance is a concern throughout the industry, and it’s something that’s particularly important to discuss with clients now, given the headline-grabbing inflation we’re witnessing.

Barnaby Williams, General Manager of Acerta, the intermediary division of Guild Insurance, says, “No one wants a customer to be underinsured. It is a bad situation for all parties involved.

“What we’ve seen in the last 18 months is increasing inflation, which has made the reinstatement cost of a building – in this case, an investment property – increase.

“It’s really important that brokers encourage their clients to have adequate sums insured and do periodic assessments of what the insurance reinstatement cost valuation is. Because unfortunately, in many people’s minds, they confuse the sale value of their property with the replacement value of their property, but the two things are completely different.”

RENTAL REPAYMENT TROUBLE AHEAD?

While total loss scenarios are the ones that often most impactfully illustrate the benefit of having the right insurance cover, the day-to-day reality often includes more everyday occurrences – and water damage is high up on that list.

“Burst pipes and water damage claims continue to play a major role in the loss ratio of strata portfolios, with many of these claims resulting from flexi-hoses that fail due to age or deterioration,” says Robson. “It’s a relatively inexpensive item in its own right, however, when they fail, the results are costly.

“Preventative maintenance and inspection of these types of exposures would assist with the reduction of claims, therefore, reducing the pressure on portfolio performance.”

From a landlord insurance perspective, it’s a similar story.

“The most common, smaller claim type is water damage within a property due to some issue with the plumbing in the premises,” confirms Williams.

Another common claim with landlord insurance is tenants defaulting on rental payments. But, while we are seeing news reports emerge of mortgage holders missing repayments due to the soaring interest rates adding hundreds – if not thousands – of dollars to their monthly repayment, Williams says the environment today doesn’t directly correlate to the risk of tenants missing payments.

“The rental market is incredibly tight – there’s a low vacancy rate of properties across Australia – so while everybody is feeling the pinch with the increased cost of living, employment rates remain incredibly high in Australia.

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“Tenant default tends to be linked more with unemployment rates, because when people lose their jobs, then they can’t pay for a roof over their heads. And right now, the unemployment rate is still near historic lows, and the available stock of rental properties are also at historic lows.”

For brokers, it’s an opportune time to have conversations with clients about the right levels of cover – and for strata clients, ensuring they have landlord cover, too.

Jonsson says, “It is more critical than ever to minimise risk as a landlord with an investment property. Landlord insurance is essentially a safety net for unforeseen events, including accidental or malicious damage, rental income loss and associated legal fees.

“Brokers should suggest more frequent inspections, ensuring the property is well maintained and keeping the lines of communication open between owner, agent and tenant.”

CASE STUDY: WHY LANDLORD AND STRATA IS A POWERFUL COMBINATION

Following a hailstorm, water leaked through a broken roof tile directly into the apartment underneath and into the owner’s main bedroom.

The owner rented out the apartment fully furnished, and water damage was sustained to the ceiling, walls, bedroom, carpet and television.

While the residential strata insurance policy covered the repairs to the ceiling, carpet and walls, the owners also had to replace the bed and television, which was not covered under the strata policy.

Luckily as the owner had landlord’s insurance, they were not left out of pocket due to the unforeseen incident.

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QPIB – A STATEMENT OF PROFESSIONALISM

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