Friday, March 23, 2012

In the wake of disasters

In the wake of disasters is the title of the report into the affordability of residential strata title insurance which was tabled this week in the Commonwealth Parliament.  As was noted by committee chairman Graham Perret when the inquiry was announced "This is an issue that cuts across areas of Commonwealth, State and local government responsibility, which means that action will be needed at all levels of government"

Body corporate and strata title regulation  itself is a state responsibility although this issue has attracated no interest during  the state election camaign.There are nine recommendations from the committee with the first calling for stamp duty relief from the Queensland Guvmint:

The Committee recommends that the Australian Government liaise with the Queensland government and urge them to implement a 12 month moratorium on Stamp Duty charged on strata title insurance for properties north of the tropic of Capricorn. This moratorium should be implemented for the 2012-13 financial year, and extended for as long as strata insurance premiums continue to rise at a higher rate than the average for general insurance.
Strata insurance is compulsory under state legislation for full replacement value. With insurance premiums increasing by hundreds of percent in most cases it could be perceived that the Queensland Guvmint has been on a nice little earner out of North Qld so perhaps a moratorium is not unreasonable? The stamp duty rate is 7.5%.

On the eve of an election I am not aware that there has been any response to this proposal from any party or candidate. I did email both my local major party candidates Kirsten Lesina (ALP) and the King Parrot (LNP) yesterday with no response from either. Perhaps with the election outcome all but determined they have both stopped caring already?

Beyond that recommendation to provide some short term relief the remainder of the recommendations essentially call for further investigation and review, including from APRA and  the ACCC, to be completed by October. This culminates in the final recommendation  for a plan of reform:
The Committee recommends that the Australian Government outline the plan of reforms it will undertake, in conjunction with relevant State and Territory governments where necessary, in order to establish a competitive and affordable insurance market for residential strata title insurance. The plan should be announced before 1 December 2012, be informed by the reviews and investigations recommended in this report, and have a particular focus on the north Queensland area.
Mejia reports: Townsville Bulletin; Cairns Post


  1. The pollies may not be able to get their heads around the issues. I've been trying to figure out the justification for the big premium hikes. Have insurance companies suddenly realised that properties with strata title insurance will have risks that are highly correlated with each other - i.e. if one unit in an apartment buidling is damaged it's highly likely others in the building will be, too, so there is less diversification of risk. It seems funny though that they've only just figured that out. Any thoughts?

  2. Actually Gene that was part of the submissions from the insurers. The insurance reps apppeared at the session in Cairns and claims history for strata was part of their justification however it's hard to see how that would relate so much to just NQ?

    I thought the submission info from insurers was poor and would question their analysis on strata claims anyway v houses. I'm keen to see what APRA may come up with as my imression is that they are pretty much on top of stuff as a regulator these days.

    Not so much ACCC. I don't buy the argument of predatory pricing by Zurich from our local LNP feral member. Insurers were still pulling out of the market even in the last year as prices escalated. Hardly predatory pricing!

    But yes, the insurers in a sense say they got it wrong before and stuffed up their risk analysis. Reinsurance costs have been mostly blamed but it's hard to see how that justifies the scale of the increases.

    Premiums started to hike before last years extreme events which makes me wonder how much insurers now take notice of climate model predictions?

    Insurers exiting also creates concentration risk for those who are left. The remaining insurers take on increased catastrophe risk in a concentrated area, such as Cairns or Airlie Beach which has to then be covered in reinsurance markets or APRA capital requirements.

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