Chapter 1 Introduction
Cyclones, fires, floods and storms have continued to ravage many parts
of Australia in recent years. The losses experienced by those in affected areas
have been extensive, and the trauma was often compounded by the experience of making
and seeking to resolve an insurance claim.
In the wake of these disasters, serious concerns have emerged regarding
the operation of the insurance industry during disaster events and subsequent
steep rises in insurance premiums across Australia. In particular, those living
in strata title complexes in north Queensland are experiencing excessive and
unsustainable premium rises.
Residential strata title is a legal ownership arrangement that involves
a combination of individual and collective ownership of property. The
individual units or apartments may be owned independently of each other while
the rest of the estate, such as common infrastructure, grounds and facilities,
is owned in common by all unit proprietors.
Residential strata title insurance, also known as Body Corporate cover
in some states, is general insurance that covers common property under the management
of a strata title or Body Corporate entity for unit or apartment complexes.
This might include common areas, wiring, lifts, pools, car parks, walls,
windows, ceilings and floors. It usually covers building and common contents,
legal liability, fidelity guarantee, personal accident and office bearer’s
In some complexes the common property may be extensive, while in others,
it may only extend to a shared wall or driveway.
The annual insurance premium for a strata title scheme is issued to a body
(or owners) corporation and is then proportioned to individual unit owners for
payment. However, the strata title insurance premium levied to unit owners only
covers common property and infrastructure. If owners wish to have insurance coverage
for the individual unit or apartment and its contents, then they must seek
separate insurance cover.
Strata title insurance is unique because it is compulsory in all states
and territories for owners in strata schemes to hold insurance over common
property and for public liability.
Over the last 20 years, there has been an increase in medium and high
density type housing. According to Australian Bureau of Statistics (ABS) data
analysed by Macroplan, in the 1990s there was one apartment approved for every
three houses. By April 2011, that ratio had shrunk to only 1.6 houses approved
for every apartment.
This increase in apartment construction is particularly apparent in
major metropolitan areas, but has also been apparent in regional urban centres such
as Cairns, Townsville and Mackay. Apartment or unit style complexes are often
attractive to retirees, pensioners and those seeking a smaller style of home or
A significant proportion of the submissions received during this inquiry
were from owners of units and apartments in desirable holiday destinations
along the north Queensland coast.
In the past five years, strata title insurance premiums have increased
significantly, particularly for people owning units or apartments in Mackay,
Townsville, Cairns and Port Douglas. The Unit Owners Association of Queensland
(UOAQ) reports that these increases have been the most excessive over the last
two years, with UOAQ members reporting increases ranging from 300 to 800
Relevant reviews and inquiries
There are a number of reviews and inquiries relating to general
insurance and the disaster events of 2010-11. These reviews are relevant to the
present inquiry where they relate to the pricing of risk, increases in the cost
of insurance and reinsurance, consumer awareness of various insurance options,
and residential strata title schemes.
ACCC insurance market pricing reviews
In 2002, the Australian Competition and Consumer Commission (ACCC)
conducted an Insurance Industry Market Pricing Review in response to
concerns that had been raised about insurance affordability following the
September 11 terrorist attacks and the collapse of HIH Insurance Limited (HIH)
The ACCC made several recommendations intended to assist consumers in assessing
whether the premiums being offered were acceptable. The review recommended:
n increases to the
previous policy’s premium should be clearly explained when policies are offered
n the industry should
provide consumers with general premium trend data and explain why premiums have
n insurers should
improve their premium complaints and query handling systems to enable consumers
to contest premium assessments and access detailed explanations for specific
The ACCC further recommended that insurers provide a standard checklist
for what was covered by policies, as well as the use of standard terms, large
font and plain English in policies.
The ACCC Review was updated later that year. In addition, the Australian
Securities and Investment Commission (ASIC) have released a number of reports
relating to consumers and insurance more generally.
Western Australia strata management inquiry
Legislation governing strata management entities is predominantly
state-based. In 2003, the Western Australian Legislative Assembly Standing
Committee on Economics and Industry conducted an inquiry into the Western
Australian strata management industry.
The inquiry report set out a number of findings, including:
n strata title law is
difficult to interpret,
n regulation of the
industry was insufficient, and
n there is a potential
risk for minority owners to have little or no say in the running of a strata
In its response, the Western Australian Government noted that further
analysis and consultation was appropriate given that the proposed reforms would
increase cost and would result in increased administrative work and
responsibilities for strata managers, government agencies and tribunals.
The Western Australian Legislative Council Standing Committee on Public
Administration conducted a further review of the strata management industry in
2011. It called for regulation
and better education of strata managers. The report made a number of recommendations
that are relevant to this inquiry, including:
n strata managers be
regulated by a system of positive licensing,
n all assets held by
strata managers on behalf of strata companies should be deposited in a trust
account and should be subject to audit by a regulatory body,
n a prescribed form of
appointment for strata managers be implemented that includes:
-> the list
of functions that can be delegated to the manager,
declaration of any commissions, payments or benefits paid to the strata manager
other than those payable by the strata company under the terms of the contract,
n lot proprietors
should be provided with a plain English statement containing information about:
strata managers have agreed to provide,
provided by the strata manager for an additional fee;
the strata manager will not provide, and
of how a lot proprietor can raise concerns, seek information, approvals or have
matters included on an annual general meeting agenda, and
n strata managers
should disclose all commissions payable to the strata company. Non-disclosure
should be an offence.
The Western Australian government responded to the report on 7 March
2012. The government announced further consultations on this issue, are
drafting amendments to the relevant legislation and is considering new
legislation to implement a licensing scheme for strata managers.
Natural Disaster Insurance Review
The Australian Government’s Natural Disaster Insurance Review (NDIR) was
conducted in response to the series of storms, floods and cyclones that
affected many parts of the country in late 2010 and early 2011. The NDIR was
primarily instigated because of widespread reports of the absence of flood
insurance for policyholders, mainly in the urban centres of Brisbane and
The NDIR recognised issues around the availability and affordability of strata
insurance in areas exposed to cyclones, especially in north-east Queensland. It
recommended that a specific inquiry into residential strata title insurance be
The NDIR made a series of recommendations that are relevant to this inquiry,
n the Australian
Government operate a flood risk reinsurance facility, supported by a government
discounts be introduced against the full cost of flood insurance for purchasers
of home, home contents and home unit insurance policies in areas subject to
n the facility to offer
cover to insurers for cyclone risk, on the same basis as for flood risk but
with no affordability discounts,
n discounts also be
provided to the bodies corporate of eligible properties.
The NDIR drew attention to the unique insurance characteristics of
residential strata title insurance which are discussed further in this report.
Insurance Contracts Amendment Bill 2011
More generally, the NDIR found that consumers have a poor understanding
of insurance options.
The NDIR therefore endorsed the introduction of a standard definition of
‘flood’ and a Key Facts Statement as a means of enhancing consumer awareness.
As a result, the Australian Government introduced legislation on 23 November
2011 to mandate the standard definition of flood and implement a Key Facts
Statement. The Insurance Contracts Amendment Bill 2011 (the Bill) is
currently before Parliament.
The Bill was referred to the House of Representatives Standing Committee
on Economics and the advisory report was tabled on 16 February 2012.
The Committee found that both consumer and industry groups supported the Bill,
concluded that the Bill represented important reforms, and recommended that the
Bill be passed.
In the Wake of Disasters – Operation of the insurance industry during
This Committee previously inquired into the operation of the insurance
industry during disaster events. The inquiry was in
response to overwhelming community concerns about the conduct of insurers
during the 2010-11 storms, floods and cyclones, including delayed claims
processing and difficulty contacting insurers.
During the inquiry, the Committee held eighteen public hearings and
visited disaster-affected communities in Western Australia, Queensland and
Victoria. The Committee was first alerted to the problems relating to residential
strata title insurance while conducting hearings in Innisfail, Queensland. Owners
of strata title residences or units in northern Queensland, particularly above
the 26th parallel, told the Committee that either they could not secure
cover from any insurer, or that premiums had reached exorbitant levels. The
Committee heard of increases in premiums ranging from 30 percent to 1 000
The Committee found that:
n the Insurance Code of
Practice is ineffective in protecting consumers,
n consumers are not
adequately aware of what their insurance policies meant,
n consumer rights are
not adequately protected in the claims-handling process, particularly during
disaster events, and
n internal dispute
resolution processes are convoluted and ineffective.
The Committee’s report made a number of recommendations to address these
issues. Specifically, Recommendation 13 calls for a joint industry-Government
action group to be established immediately to address the rising costs and
potential market failure affecting insurance premiums across Australia.
The Australian Government has six months to respond to the report, but
some of the recommendations call for more urgent and immediate action.
The report attracted significant media coverage, which drew the public’s
attention to the important recommendations it contained. 
The Committee trusts that this media coverage, and subsequent public awareness
of the important recommendations that are before the Government, will result in
the necessary reforms to be implemented.
The Insurance Council of Australia (ICA) responded in the media,
claiming that the recommendations referred to ‘changes already enacted by
either the insurance industry or the Federal Government’. 
They asserted that ‘current dispute resolution processes had proven robust and
effective’ and that ‘more than 90 percent of all claims relating to last year’s
catastrophes have been closed.’
Scope of current inquiry
On 24 November 2011 the Assistant Treasurer and Minister for Financial
Services and Superannuation, the Hon. Bill Shorten MP, asked the Committee, in
addition to undertaking its inquiry into insurance issues arising as a
consequence of natural disasters, to inquire into and report on residential
strata title insurance.
The terms of reference for this inquiry are as follows:
That the House of Representatives
Standing Committee on Social Policy and Legal Affairs also inquire into and
report on the affordability of residential strata title insurance, particularly
in Northern Australia, and factors influencing this, including:
-> (a) The
magnitude of the increases in the cost of residential strata insurance over the
past 5 years, the reasons for these increases and whether these increases are
likely to be sustained,
-> (b) The
ability of insurers to price risk and the availability of accurate data to
allow for this,
-> (c) The
extent to which there is a failure in the insurance market for residential
strata properties either generally across Northern Australia or in some regions
in particular, for example due to a lack of competition between insurers,
Whether consumer awareness of different insurance options should be enhanced,
-> (e) The
extent to which the nature of body corporate arrangements are contributing to
affordability difficulties, and
Whether the conclusions regarding (a)-(e) provide justification for government
intervention in the residential strata insurance market, noting the existing
responsibilities of Australian, state and local governments, for example:
the Australian Government has responsibility for insurance
regulation under the Insurance Act and the Insurance Contracts Act and
competition and consumer regulation under the Competition and Consumer Act, and
state governments (and local governments where appropriate) have
responsibility for strata title legislation, building regulation, land use
planning regulation and specific state government interventions in insurance
markets (for example home builders warranty insurance, compulsory third party
The Inquiry should have regard to the
and businesses should be encouraged to insure themselves where practicable, and
intervention in private insurance markets is justifiable only where, and to the
extent that there is clear failure by those private markets to offer
Despite advertising nationally and contacting representative
organisations from other states and territories, no submissions were received
that raised concerns about the affordability of strata insurance in areas
outside of Queensland. Where investors owned multiple properties and/or lived
elsewhere, concerns regarding strata title insurance affordability were
confined to the north Queensland area.
Consequently this report focuses on north Queensland and examines why residential
strata title has become a localised affordability issue.
While examining the affordability of residential strata title insurance,
the Committee also received a volume of correspondence from people in other
circumstances experiencing rising insurance premiums or the inability to secure
insurance. The Committee notes the seriousness of these concerns, particularly
when it affects pensioners and those on low incomes, or when it threatens the
sustainability of businesses such as farm stay or bed and breakfast type
However, as these concerns fall outside the terms of reference for this
inquiry, the Committee has not been able to investigate further. Nevertheless,
in its earlier report, In the Wake of Disasters: the operation of the
insurance industry during disaster events, the Committee took the
opportunity to recommend the immediate establishment of a taskforce to address
the rising costs and potential market failure in the insurance industry across
The Committee trusts that the Government will respond promptly by
implementing the important reforms it has already recommended, and will also
implement the recommendations contained in this report.
Conduct of the inquiry
The Committee recognises the urgency of the issue of residential strata
title insurance affordability. Unit owners are already experiencing financial
stress and indications are that these types of premiums are expected to
continue to rise. Increases to date have been substantial, and continuing
increases of this magnitude are clearly unsustainable for unit owners.
In addition to the devastating personal toll already caused by increases
in strata insurance premiums, any continued increases will threaten the
economic viability of many areas in north Queensland.
With this in mind, the Committee resolved to conduct this inquiry expeditiously
within a shortened reporting timeframe. While this may have reduced the time
for consultations, it was the clear view of the Committee that prompt action
would be required and that it was the Committee’s duty to set out before the
Australian Government a clear and direct plan of action to both alleviate
immediate distress and address longer term sustainability issues.
Within the shortened timeframe, the inquiry’s terms of reference and
call for submissions were advertised nationally and the Committee wrote to a
range of organisations seeking submissions.
The Committee received 431 submissions, and 17 supplementary submissions.
A list of the submissions received can be found at Appendix A. The Committee
also received one exhibit, which can be found at Appendix C.
The Committee held public hearings in Port Douglas, Cairns, Townsville, Mackay
(via videoconference) and Canberra. Community forums were held at many of these
locations. Transcripts from these hearings are available through the
Committee’s website. Details of the public hearings and the witnesses who gave
evidence are listed at Appendix B.
The Committee was overwhelmed by the response of those affected by these
issues. The number of submissions and the large number of people who attended
the hearings confirmed the magnitude of community concerns and the extent to
which people are being financially and emotionally impacted.
The Committee thanks those who made submissions, appeared at public
hearings and participated in the community forums.
Structure of the report
This report comprises four chapters.
Chapter Two sets out the legislative and regulatory framework for
residential strata title insurance, examines the magnitude of premium increases
and the associated impacts and community concerns, and discusses the additional
cost impost of Stamp Duty and Goods and Services Tax (GST).
Chapter Three examines the evidence the Committee received in relation
to the reasons for recent strata insurance price increases. It reviews a range
of factors that were suggested as contributing to premium increases, including:
n the rising cost of
raising and servicing capital to meet capital adequacy requirements,
n the rising cost of
n an elevated pricing
n characteristics of
residential strata title schemes that make them more costly to insure, and
n a lack of competition
in the residential strata title insurance market in north Queensland.
Chapter Four examines additional community concerns that were expressed
to the Committee during the inquiry, including:
n the role of
intermediaries (including strata managers and brokers) in the negotiation of
insurance contracts and the commissions they charge,
n the nature and role
of property valuations and claims history in assessments of risk, and
n flexibility in
negotiating insurance arrangements, including excess levels, insured value and
choice in what is insured.
Many of the recommendations set out in this report have clear timeframes
associated with them, in recognition of the urgency of the issues. However
there are no quick fixes for this complex problem, and the Committee took care
to explain this to those affected during its consultations with the public.
The recommendations made here address the regulatory frameworks,
methodologies for the assessment and pricing of risks, and consumer awareness. They
dictate a course of action that will unravel the factors at play and enable
appropriate reforms to be implemented.
Throughout the inquiry, the Committee was moved by personal stories of
the hardship and fear caused by successive insurance premium increases. From
the many submissions received and the public hearings, a selection of personal
experiences and anecdotes has been compiled into textboxes that are included in
These textboxes serve as a potent reminder that driving the urgent need
for reform are the experiences of people living in strata title complexes.
These people are bound by law to have strata title insurance and are facing an
uncertain future if their premiums continue to rise at exorbitant rates.