Climate change is driving insurance premiums higher – in strata properties premiums are set to rise nationally by 15-20 per cent from the start of FY24, according to Honan Insurance Group, driven by “claims costs inflation, rising building valuations, and insurers raising rates after periods of losses”.
Rebecca Crowther, client manager for the company, says premiums could rise to 35 per cent “for those with challenging claims histories”. Benefits starting to emerge from Queensland’s ARPC Cyclone Pool are exceptions.
Crowther offers the following steps to mitigate premium increases:
1. Investment in quality materials
Short-term cost-cutting can lead to expensive long-term headaches. Two decades of declining design and building quality in large multi-level developments have led to structural defects, passive fire penetration defects, waterproofing failures, and water ingress issues. Buildings with defects continue to wear the most significant premium increases, imposed policy conditions and challenges with obtaining insurance at all.
Owners and developers should also consider insurance premiums in construction material selection. For example, buildings containing materials such as flammable ACP cladding or NRG Greenboard limit insurer appetite and attract higher premiums.
2. Assess the future risk of design
Contemporary design features such as garden rooftops, rooftop pools and balcony greenspaces are becoming increasingly popular, but they can carry unique risks. These risks include water membrane failures, maintenance issues and fire hazards. There have even been instances of strong winds blowing trees off rooftop greenspaces, which is a potential liability exposure, incidents of costly concrete spalling caused by leaking pool membranes and concerns over potential fire hazards of greenspaces effected by drought.
It’s imperative property owners and developers assess and conduct risk surveys for long-term design and build quality, ensuring safety and durability are factored in to building aesthetics.
3. Conduct accurate valuations
In some cases, developers may place insurance policies for the project’s construction costs resulting in insufficient coverage in the event of a total loss. A comprehensive insurance valuation should always consider debris removal, professional fees, escalation, and complete rebuilding expenses.
To avoid unforeseen second-year premium increases, owners and developers should conduct an independent valuation within 60 days of practical completion to ensure the initial premium accurately reflects the building’s replacement costs. Existing strata buildings should also make sure their valuations are up to date, with individual state legislation stipulating between anywhere from 2-5 years.
4. Obtain insurance at practical completion and strata plan registration
Insurance requirements shift during each phase of the building development cycle. Once a development reaches practical completion and is handed over by the builder, insurance policies obtained for the construction phase are no longer valid. A strata insurance policy should be put in place to provide insurance coverage for the building.
Once the strata plan reaches registration and endorsed to extend the policy expiry date, developers must secure insurance for a full year from the registration date. It is worth noting that some insurers enforce mid-term policy cancellation and subsequent reinstatement for a full 12-months from the registration date to meet this requirement.
5. Maintain developments over time
All properties inevitably experience wear and tear over the years, but insurers expect a building to be maintained in a reasonably good state of repair. Buildings with defects and outstanding maintenance received the most challenging premium increases, imposed policy conditions and challenges with obtaining insurance.
As with any risk mitigation practice, prevention is always better than cure. Ongoing maintenance programs help to identify risks before they become significant issues that can lead to costly causation repairs and subsequent insurance claims.
While premiums continue to increase across the board, there is variation in underwriting guidelines that can see fluctuation in rates as great as 100 per cent. Strata managers and owners should work closely with insurance brokers to communicate clear action plans and regular progress updates to insurers for known issues such as open claim causation maintenance or defects.
It is always in building owners and developers’ best interest to invest in mitigation strategies that position them as a low-risk option to insurers, which can ultimately drive material reductions in premiums.