I recently posted Insurance Moves following media reports of rapidly increasing strata insurance rates for some properties. This week from ABC Radio: Can Australians continue to safely (and affordably) live amongst the trees, or by the sea?

There are reasons to be skeptical of anecdotal numbers which have previously proven unreliable on analysis. The Mackay property discussed here by ABC is the same one referenced in the previous post. Again I would be reluctant to ascribe too much to extreme anecdotal reports without full information including details of all quotes and the property building valuation and full claims history. An insurer seeking to reduce exposure to NQ in a La Nina event will likely quote high is my experience from 2011. The property concerned is in the most high risk cyclone surge zone residential area of Mackay.

Meanwhile this week a stockbroker research note on strata insurance from Macquarie via FN Arena:

Are we stratisfied?

Gross written premiums (or the total premium given to the insurer less any deductions) for strata insurance have been rising by 8-10% on average over the last three years. But that’s not all. Strata premiums are also expected to keep growing for the next 12-24 months.

A quick look at what strata insurance is. It is mandatory to have insurance covering the common/shared property for building complexes like flats and apartments against loss or damage. This type of cover is strata insurance. Common areas like pools, lifts, parking lots etc are also included. A strata policy of insurance normally covers properties within one building or land block or complex and is available for both residential strata and commercial strata properties.

According to a study by Macquarie, the construction boom in recent years has fueled a growth in strata schemes at the rate of circa 3.8% per annum over the last two years. The market size is now circa $1.1bn, making strata insurance one of the largest products in the country

As mentioned at the beginning, the strata insurance market has also seen gross written premiums rise – quite strongly at that – over the last few years.

A combination of construction growth and premium rate tailwinds have contributed to a circa 8.2% compounded annual growth rate in premiums (GWP) for strata insurance products over the past four years.

But here is the anomaly. Despite the fast-growing market and the growing premiums, there is a paradoxical lack of competition in strata insurance. In fact, Macquarie highlights the total number of strata policies in Australia peaked in FY14.

Even the strong growth in GWPs has not been enough to lure companies. On the contrary, both Insurance Australia Group ((IAG)) and Suncorp ((SUN)) have reduced their exposure to the strata insurance market. Only QBE Insurance ((QBE)) has increased its market share to circa 48% from about 40% and is the only money-making insurer in strata, according to Macquarie.

What could be the reasons? For starters, there have been more and more quality issues with the construction of towers – both residential and commercial over the last twenty years or so, Macquarie notes. Major cracks found at Mascot Towers and more recently, cracks at the Opal Towers are classic examples.

A study by UNSW found about 48% of the 340k registered strata schemes in Australia in 2020 were registered in the last 20 years. Simply put, the recent builds have been found to contain more defects than older ones. This, in a nutshell, is what the potential problem is for insurers.

The other part of the problem is some parts of Australia are in more of a mess than the others – Northern Australia for instance. This has led to a concentration of insurance capacity in certain regions.

In fact, the Australian Competition and Consumer Commission (ACCC) found each market leader holds more than 40% market share in North Western Australia, Northern Territory and Queensland as well as nationally.

Such concentration adversely impacts insurance pricing. As an example, the ACCC found strata premiums in Northern Australia to be considerably higher than in the rest of the country. Likewise, average premiums in north West Australia were more than four times the entire country’s average of $3.3k.

Despite all this, insurers are still not making money. Macquarie finds over the last 12 years, the profit margin for strata insurance has been -13% on average for Northern Australia and only 2% for the rest of Australia.

The ACCC’s conducting a review of the national strata insurance market as part of their Northern Australia Insurance Inquiry final report. Macquarie believes it unlikely any findings by the ACCC would lead to sweeping reforms given the state-based oversight of the strata sector. The broker remains positive on the general insurance sector.

I’m confused by the statement that the number of strata policies nationwide peaked in 2014 given growth and that this class of insurance is compulsory. Maybe I have misunderstood. Final report from ACCC is imminent but expectations are not high.

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