Reinsurance Pool Deep Dive: Part 1

By Chris Irons

While hardly the sexiest issue on the planet, insurance is nonetheless one of the most significant. Getting all philosophical about it, humans cannot do much – if anything – to control catastrophic events, and the next best thing, therefore, is having a safeguard against their (financial) impacts. That is our extremely basic take on insurance.

Body corporate, or strata, insurance, is a whole other kettle of fish. That kettle gets even more complex when you cast your gaze to the north of Australia, and particularly, North Queensland. We have heard for several years the increasingly dire predicaments of strata schemes in NQ when it comes to their insurance premiums – or lack thereof. Responding to this, the Commonwealth is introducing what it terms a reinsurance pool. Sounds great, doesn’t it? And yet, what does it all mean and when all is said and done, what are the coalface, on-the-ground impacts for strata schemes in NQ?

Our deep dive into the reinsurance pool will address these questions. Before that, though, Strata Solve is firm believer that to move forward, you firstly must look back. When it comes to strata problems, that is 100% the case: we know, from experience, that the genesis of most, if not all, strata issues, is steeped in the cloudy fog of history.

In other words: how did we get here?

Well, when we talk about the problems with NQ strata insurance, we are talking about two things: affordability and availability. Some schemes experiences problems with both. Other buildings might struggle with one or the other.

‘Availability’ is just what you think it is: not being able to source ANY cover from anyone or anywhere. We know of some strata schemes which can point to having contacted a dozen or more insurers, including offshore insurers, only to get refusals from all of them. In this scenario, there is not any point in stressing about how much a premium will cost the body corporate, because there is no premium to stress about.

Similarly, ‘affordability’ is self-explanatory, with some additional nuances. Some of the affordability horror stories Strata Solve has heard from NQ buildings include a premium of $100k one year morphing into over $400k the next. Remember that every lot owner must foot the bill for that increase, in addition to the levies they regularly pay. Even the most mildly-skilled mathematician can tell that that will be a significant impost on every owner.

Many factors contribute to the availability and affordability issues for NQ strata. Geography is one of the main ones. NQ is a fantastic part of the world – Strata Solve has enjoyed many great experiences in Cairns, Townsville, Palm Cove, and surrounds – and yet it is precisely that location which puts it in the firing line of cyclones and severe storms, in a way that the rest of Queensland (and Australia) do not experience. Cyclones are not a part of life on Sydney’s North Shore, for example. A cyclone is by definition a violent event with equally violent outcomes, including damage from wind, rain, and debris. That is even before you get to things such as power being cut or roads being inaccessible. Every one of those things will come at a significant emotional and financial cost and it is the financial side of it which insurance is meant to cover. While Strata Solve usually tends to avoid simplistic descriptors, we think the equation here can be reduced to:

NQ exposure to cyclones + cost arising out of that exposure = increased insurance premiums

That is just one of the issues at play here, of course. Fluctuations in insurance premiums are subject to global events too. We would never say we are content experts in the minutiae of insurance. What we would say, though, is that if you accept our equation above, then you can accept that there is little, if any, motivation for insurers to get into the strata insurance market in NQ. Think about it this way: like any other commercial entity, insurers are in the business of profit-making. If providing a particular type of insurance is going to cost a lot of money (and a whole lot of grief into the bargain), it makes sense to not bother providing it.

Which is a nice segue into ‘availability’. We have seen over the years fewer and fewer insurers willing to provide cover to NQ strata schemes. This is where your high school economics classes will start to kick in. Fewer participants in a market leads to less competition and less competition drives up prices. ‘Availability’ and ‘affordability’ are inexorably intertwined.

The Commonwealth’s reinsurance pool is, at its heart, a mechanism designed to encourage more providers to get back into the NQ strata market. When that occurs, or so the theory goes, strata schemes will have more options to choose from. More options to choose from should then mean reduced premiums. At this point many people reading this might be thinking ‘Gee Strata Solve, you’re getting pretty over-simplified there’. Well to be blunt, we do not really have much to go on. The reinsurance pool legislation is scant (to be kind) on detail. Reading the oxymoronically-titled Explanatory Memorandum does not get you any further. We get it. Governments are not in the business of giving out a lot of information if they do not really need to. No politician wants to be wedded to anything and having wriggle room is all important.

Even so, it is hard to shake the feeling that the legislation has been left deliberately vague. You can speculate on why that is the case to your heart’s content, although the fact there is a Federal Election coming up in a few months, where NQ seats will be crucial to victory for either party, may have something to do with it. Cynics amongst you will wonder if the mere announcement of the reinsurance pool just a few weeks ago was seen by the incumbent government as sufficient at this stage: give the headline grabbing material now, fill in the pesky details later.

Regardless of your political interpretation, the facts are these: we cannot tell from the draft reinsurance pool legislation how the scheme will practically operate. We also cannot tell if the projections of as much as 50% premiums reductions will pan out and we cannot tell how soon after the anticipated 1 July start date that will occur. Absolutely no one can tell, with any certainty, if or how many new entrants will appear in the NQ strata market because of the pool. And on a purely pragmatic level, the draft legislation remains subject to scrutiny by the Senate, at this stage scheduled for March. Which is, of course, perhaps when the Federal Election may be called. Once the election is called, legislation does not get further considered and so we think there must be some reasonable doubt the reinsurance pool will commence at all, let alone by 1 July. That is not us being pessimistic – we hope it does and achieves what it is meant to do – it is merely us being practical.

Nonetheless, Strata Solve will, in subsequent parts of this Deep Dive, give its best interpretation of the reinsurance pool legislation a go – if you don’t have a go, you won’t get a go, after all. That is not all though: Strata Solve is going to look more broadly at NQ strata insurance and in the process, throw the onus back onto the State Government. The legislation about what a strata scheme must do in relation to its insurance is all Queensland-based and it makes sense that many of the solutions to the NQ strata insurance problem may lie firmly within the Body Corporate and Community Management Act 1997 (the BCCM Act) and its attendant Regulation Modules. We are going to put forward some provocative ideas about those solutions. Finally, we are going to give owners, committees, onsite managers, and body corporate managers dealing with NQ strata schemes some practical tips on what they can do with or without the reinsurance pool

Want to keep up with our Deep Dives? Be sure to register for updates. Part 2 on the Reinsurance Pool Deep Dive is coming soon.

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