Strata insurance - BCsystems

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For most bodies corporate, strata building insurance is compulsory for the common property and also usually for each lot. This may depend on the plan type, however nearly all bodies corporate in Australia deal with strata insurance.

This article contains general factual information only, and should not be considered insurance advice. If you require specific insurance advice, please get in contact with our BCsystems team.

What is strata insurance?

Strata insurance is a highly specialised insurance product, usually incorporating the following elements into a single policy:

Building insurance (damage or loss of the physical building)
Body corporate contents/asset insurance for the common property
Machinery breakdown (elevators, pumps etc)
Public liability for common property
Committee member personal liability insurance
Fidelity insurance (protecting the body corporate’s funds)
Legal defence
Loss of rent
Government audit costs

Whilst strata insurance covers some of the same things as normal home and contents insurance, it operates quite differently. For more information on what is included and excluded from typical strata insurance policies, read our website FAQ about insurance.

Annual strata insurance premium change

Strata insurance is assessed and renewed annually, and strata insurance pricing is set by each insurer independently. There are some common factors considered by all strata insurers when determining the renewal premium.

What are the main factors which influence the strata insurance premium?

1. Building sum insured (building valuation)

Often abbreviated to BSI, the building sum insured is the replacement cost or construction value of the building. This valuation is not related to the sale value of each lot, it is calculated by a quantity surveyor or valuer, and it informs the insurer about how much the building would cost to replace if it was totally destroyed.

The building sum insured generally includes the following components:

Demolition of building debris (e.g. if the building was destroyed by fire)
Site clearing
Architect fees to design new building
Council application and legal fees prior to construction
Engineering, project management and other professional consulting fees
Building contract to replace the building like for like
Allowance for inflation during the 2-3 years in between building destruction and replacement

As the costs involved in the building sum insured increase year on year (in particular construction costs), the insurer automatically increases the building sum insured each year. The insurer will increase the sum insured based on the average building cost increases. This means that generally the body corporate gets more insurance cover each year to keep up with rising replacement costs.

To arrive at an accurate building sum insured, the body corporate legislation requires that the building sum insured be valued by an expert at least every 5 years.

1. Claim history

All insurance companies operate by collecting more in annual premiums than they pay out in claims across all of their insurance customers. Just like car and home insurance, strata insurance policies become significantly more expensive if your body corporate has made claims in the past few years.

When quoting the annual premium, the insurer will look at the claims history for the last 5 years. When obtaining new quotes from other companies, they also ask to see the claims history for the same period.

If a person crashes their car 2 times per year, that person would struggle to obtain car insurance. The insurers would consider that person a bad investment, and would either decline to quote, or may impose a very high premium and excess. The same principle applies to all insurance products, including body corporate insurance.

3. Inflation on claims costs

It is extremely rare for body corporate buildings to be totally destroyed, however smaller claims are very common. For smaller claims (e.g. a storm causing damage to ceilings), the body corporate insurer is exposed to the building industry pricing. If the cost of plastering materials or plastering wages has increased, the insurer will be required to spend more money to repair the damage.

Insurers therefore take into account building industry wages, material prices, wait times, and their own staff wages when determining annual insurance premiums.

4. Insurance company pricing policy

Insurance companies (including strata insurance companies) are generally underwritten by large global companies. Those companies set their pricing based on their own financial position. A natural disaster (such as bushfires in New South Wales) may impact Queensland strata premiums, as the insurers may be financial impacted by large events. Usually these large disaster or other global events affect all insurers, meaning most policies increase in a similar way.

5. Building features or defects

Insurance companies track their claims and trends very carefully. If an insurance company sees a trend of claims across other buildings (e.g. burst flexi-hoses), the insurer may ask questions about your body corporate, and apply a risk-requirement that your body corporate inspect all of its flexi-hoses to see if any are defective. If your body corporate does not comply with this request, the insurer may increase premiums or apply an additional excess based on the increased risk that your body corporate may make similar claims.

What can the body corporate do about it?

Some of these factors are out of the body corporate’s control (like natural disasters), however there are ways that the body corporate can keep the annual insurance premium as low as possible:

Consider quotes each year (BCsystems automatically arranges quotes from multiple insurers each year)
Avoid making claims where possible (especially low value claims)
Follow the insurer’s advice if it gives any building recommendations

Our BCsystems strata managers are experts at the factors which influence strata premiums. If we see an opportunity for your body corporate to minimise its insurance premium increase, we will advise you.