Chapter 2 Regulating, pricing and taxing risk
This chapter outlines the legislation and regulatory bodies governing
insurance in Australia, with a particular focus on residential strata title
insurance. While strata title insurance is required in all states and
territories, reference is made to Queensland legislation since the evidence
received during this inquiry related only to affordability issues in Queensland.
Premium increases in the strata title insurance market have been
significant, despite there having been little regulatory change. The Committee
received a volume of evidence citing substantial premium increases. A summary
of these accounts is provided, along with details of some of the personal and
economic impacts of these premium increases.
Added to strata title insurance premium costs are state government Stamp
Duties and the Goods and Services Tax (GST). The impact of these additional
imposts is discussed, along with the scope to alleviate an element of these
costs in the short term.
The residential strata title insurance industry in Australia is
regulated by a range of Australian and State and Territory legislation. This
section provides a brief overview of the relevant legislation and regulatory
bodies. A more detailed examination of the statutory framework for general
insurance in Australia can be found in Chapter Two of the Standing Committee on
Social Policy and Legal Affairs’ In the Wake of Disasters: The operation of
the insurance industry during disaster events, March 2012.
The Australian Government has responsibility for insurance regulation
under the Insurance Act 1973, the Insurance Regulations Act 2002
and the Insurance Contracts Act 1984, and competition and
consumer regulation under the Competition and Consumer Act 2010.
State governments (and local governments where appropriate) have
responsibility for strata title legislation, building regulation and land use
planning regulation. There are some further specific state government measures
operating in insurance markets, for example in relation to home builders
warranty insurance and compulsory third party insurance.
The Australian Prudential Regulation Authority (APRA) was established in
1998 to oversee the financial services industry, including the insurance
industry. APRA’s main responsibility in the area of insurance is to ensure that
insurers operate in accordance with prudential regulation and are able to meet
their Prudential Capital Requirements. Insurance companies must be able to
demonstrate to APRA that they have adequate capital to remain financially sound
and to ensure that policyholder interests are protected.
Following the collapse of HIH in 2001, the Australian Government
introduced regulatory changes that imposed greater capital adequacy
requirements on insurers.
As with other financial services industries, insurers are regulated by
ASIC. ASIC administers the legislation set out in the Australian Securities
and Investments Act 2001 (Cth) (ASIC Act), and the Corporations Act 2001
(Cth) (Corporations Act). The ASIC Act provides consumer protection, while
the Corporations Act provides for a licensing system for financial services
Insurance companies can also be subject to the scrutiny of the ACCC, which
administers Commonwealth competition, fair trading and consumer protection
Requiring strata title insurance
While the legislation governing the operation of strata schemes varies
across jurisdictions, Body Corporates are statutorily required to take out
insurance in every state and territory. The main reason for this is because
individual lot owners in strata schemes are both joint and severally liable for
the property they share. This means that, by purchasing and entering into a
body corporate arrangement, they are both individually liable for the shared property,
and liable as members of the body corporate.
As Strata Community Australia (SCA) point out, the underlying policy
intent is clear:
Strata insurance needs to be mandatory because of the
unlimited liability of each owner to the entity. Should a building suffer an
uninsured loss, each owner is jointly and severally liable to make good whether
or not they approved or indeed had any role in making insurance arrangements.
In effect a building cannot become insolvent unless every owner is also
insolvent or bankrupt. To overcome this moral hazard, the statutes and
regulations require those responsible for the building's management to mitigate
the risks of losses through insurance. The only alternative to meeting
uninsured losses is termination of the strata title as a route to sale of the
Concerns were raised by several witnesses about the nature, and
insurance cost implications, of the liability status of strata schemes.
The Committee is of the opinion that this is evidence that Body Corporates need
to have a clear understanding of the legal status of strata schemes, and how
that legal status may impact upon their premium prices. This is discussed
further in Chapter Four.
The Committee received evidence that many Body Corporates were
struggling to make required insurance payments, to the point where some were
forced to take out loans to meet unanticipated premium increases.
However there was general acceptance throughout the inquiry that strata title
insurance was necessary and was a statutory requirement to protect unit owner
investment in common property.
Given that evidence to this inquiry was limited to concerns about strata
title affordability in Queensland, the following section focuses on
Queensland’s legislative requirements for strata title insurance.
In addition, a review of the strata title legislation in Australia
asserted that ‘Queensland is considered by many as a national leader in the
establishment of effective yet flexible strata industry regulation’.
Consequently Queensland provides a useful benchmark for a comparison of
legislative regimes throughout Australia, and any general references to Body
Corporate legislation made by the Committee should be taken to mean Queensland
legislation. However, the conclusions drawn should be applied in principle to
legislation in other jurisdictions.
Body Corporate legislation in Queensland
In the Queensland Government’s submission, the Department of Justice and
the Attorney General state that Queensland has specific legislative
requirements for insurance of community title schemes, as set out in the Body
Corporate and Community Management Act 1997 (BCCM Act) and its associated
regulations, and the Building Units and Group Titles Act 1980 (BUGT
According to this body of legislation:
Premiums for insurance policies required to be taken out by a
body corporate (which is made up of each lot owner in a community titles
scheme) are a body corporate expense and form part of the body corporate fees
which must be paid by lot owners. The insurance premiums are generally
portioned between each lot owner in a scheme based on the relevant lot
entitlements applying to each individual lot. 
An important element of insurance requirements for strata schemes is
public risk. In Queensland:
The body corporate must take out public risk insurance over
the common property and for assets for which it is practical to have public
risk insurance. The body corporate is not required to take out public risk
insurance over any other property, such as a lot owned by a person other than
the body corporate.
The public risk insurance must provide for the following type
and level of coverage:
n for amounts the body
corporate becomes liable to pay for compensation for death, illness and bodily
injury and damage to property
n to the value of at
least $10 million for a single event, and at least $10 million in a single
period of insurance.
The body corporate may elect to take out more insurance than
is required by the regulation module applying to the scheme. For example, it
may obtain directors and office bearers liability cover for committee members.
Further, all common property must be specified and included in the
insurance coverage. Under the BCCM Act, Body Corporates:
must insure common property, body corporate assets and
buildings in which lots are located. The type of survey plan registered for the
community titles scheme affects the body corporate’s responsibility to insure a
building. The common categories of plans registered as community title schemes
n Building Format Plan
- A building format plan of subdivision is a form of subdivision that normally
occurs within a building. An example of a scheme that is established as a
building format plan is a multi-storey block of residential units.
n Standard Format Plan
- A standard format of subdivision plan defines land with references to marks
on the ground or a structural element (for example, survey pegs in the ground).
An example of a scheme that is established as a standard format plan includes a
townhouse complex where on each lot is a building and a backyard or courtyard.
For the relatively small number of lot owners in schemes registered as Standard
Format Plans, where they are ‘stand-alone’ lots and where they do not share a
common wall with a building on another lot, there is a degree of flexibility. In
this instance, unit owners may establish a voluntary insurance scheme.
The Committee did not collect evidence on these types of stand-alone
complexes or their insurance arrangements.
For the vast majority of strata title complexes (which are categorised
as Building Format Plans), there is the requirement that coverage must be
obtained for all common property and assets and must be for full replacement
value, regardless of the current condition of assets.
Therefore, coverage must include all costs associated with ‘making
good’, including expert and consultant fees and all aspects of demolition and
The body corporate must insure the
common property (such as a pool or fences) and the body corporate assets (such
as plant and equipment) to full replacement value. The insurance policy must:
damage* and the costs associated with the reinstatement or replacement of
insured buildings, (including the cost of taking away debris and the fees of
architects and other professional advisers), and
for the reinstatement of property to its condition when new.
Similar full replacement coverage, including associated costs, is
required for buildings:
The body corporate must take out
the following building insurance:
format plan - insurance for the full replacement value of each building which
contains a lot, and
format plan where a building on one lot has a common wall with a building on an
adjoining lot - insurance for each building to its full replacement value.
A policy for building insurance
damage* and the costs associated with the reinstatement or replacement of
insured buildings, (including the cost of taking away debris and the fees of
architects and other professional advisers), and
for the reinstatement of property to its condition when new.
* The regulations under the BCCM
Act provide a statutory definition of damage for coverage under insurance
required to be put in place under the legislation. This definition of damage
includes earthquake, explosion, fire, lightning, storm, tempest and water
damage, glass breakage, and damage from impact, malicious act and riot.
Buildings regulated under the BUGT Act have similar insurance
requirements as those regulated by the BCCM Act.
The Committee has noted that there scope for confusion in the applicability of
different legislation to strata complexes in Queensland. The need for clarity
in strata title legislation contributes to the Committee’s discussion around
the need for a legislative review in Chapter Four of this report.
A further requirement for Body Corporates in Queensland is that they
must obtain an independent valuation for the full replacement value of the
building or buildings at least every five years. This valuation must take into
account all associated costs with replacement and making good with common
property, building and assets as set out in the relevant legislation. The full
replacement valuation is required to be provided to individual lot owners.
The Committee received evidence questioning the validity of some
valuations, and the need to insure all assets and property for full replacement
value. These issues are discussed further in Chapter Four, which considers
flexibility and transparency in insurance arrangements.
Many households and businesses across Australia are now facing increased
insurance premiums. In some instances, these increases are extreme and are
threatening the capacity of people to remain in their homes or to operate their
The Committee is aware that insurance affordability is a national issue.
In its earlier report on the operation of the insurance industry during
disaster events, the Committee recommended the immediate formation of a
Government – industry taskforce to investigate the insurance market and
validity of these increases. 
However strata title owners in north Queensland are in a unique predicament
n there is a
concentration of strata title properties along the north Queensland coast,
n common property
insurance is compulsory,
n some insurance
premium increases are of a magnitude not reported elsewhere,
n for many this is the
second or third successive year of extreme premium increases, and
n there are few
insurance companies offering strata title insurance in these areas.
For these reasons, the impact of strata title premium rises has been
particularly significant in the north Queensland market. Further, it is not
clear whether these premium rises directly result from increased assessed risk
following recent disasters in the area – although the increases have certainly
been most dramatic following the extreme weather events of 2010-11.
Since the 2010-11 floods and Cyclone Yasi, the Queensland Government received
reports from unit owners of increases in their strata insurance premiums of
between 130 and 360 percent on the previous year.
The UOAQ report large increases, stating that in the years 2010 and
2011, its members raised concerns about increases in their strata insurance
premiums of between 300 and 800 percent.
Similarly, SCA state that their members began reporting ‘jumps in
renewals of 100, 200, 300 percent and more from late in 2010’. 
SCA claim that premium increases were observed prior to the major weather
events of 2010, reporting that its members:
advise that increases of this magnitude began to appear in
late 2010, before the two major weather events of early 2011, the Brisbane
region floods and Cyclone Yasi.
Accordingly SCA claim that ‘increases had little apparent relationship
to risk factors such as age, construction method, location or claims history’.
They also note that it is difficult to accurately quantify increases,
The strata management industry is highly competitive and
companies generally regard the outcome of insurance negotiations on behalf of
clients as commercially sensitive, which means large scale quantitative
information on actual cost experience is difficult to obtain from these
The majority of the submissions made to the Committee were from
individual unit owners citing premium increases over the last three years. For
n The annual strata
premium for an apartment complex at Airlie beach rose from $4 500 in 2009-10 to
$32 000 in 2011-12, an increase of over 600 percent.
n The annual strata
premium for a complex in Cairns increased from $30 000 in 2009 to $120 000
in 2011-12, an increase of over 300 percent.
n The annual strata
premium for a complex in Townsville increased from $37 660 in 2011 to $160 551
in 2012, an increase of over 300 percent.
The Committee was not able to obtain reliable data on the scale of
increases over recent years, and recognises the difficulties in attempting to
quantify increases across building types, locations etc. However, the sheer
volume of personal stories supplied to the Committee (some of which are
reproduced in textboxes throughout this report), the distress of those who
spoke to the Committee, and admissions from insurance companies regarding
recent premium ‘price adjustments’ all validate the claims of extreme and
successive insurance premium rises specific to the strata title market in north
Based on this anecdotal evidence, the Committee concludes that many
premiums have risen in excess of 300 percent in the last three years, with some
increasing by that value in the last year alone. For each individual lot holder
in a strata scheme, this could represent an increase of anywhere between $1 000
and $4 000 per annum.
The ICA supplied the average premium costs for strata properties at
three different locations in north Queensland for 2012 and 2011. These figures
are reproduced in Table 1.
Table 1 Comparison of north Queensland average strata
insurance rates (2010-2011)
Average Annual Premium ($)
Average Annual Premium Per Strata Unit ($)
submission 380, p. 5.
While the percentage increases supplied by the ICA were not as large as
have been reported elsewhere, they still represent significant cost increases
that have serious financial impacts for the people affected.
Impact of increases
It is clear from the evidence received that residential strata title
insurance increases are seriously impacting people’s livelihoods and that any
further premium rises will exacerbate the situation further.
Throughout the inquiry the Committee has heard about the impacts this
urgent issue is having on individual lot owners, investors, and the broader
economy in affected areas.
The evidence of emotional and financial impact received by the Committee
has been consistent. In particular, of concern are:
n pensioners, retirees
and other people on fixed incomes, who are most vulnerable to sharp increases
in their cost of living and are struggling to cope with colossal
insurance-driven increases in Body Corporate fees:
-> some have
already suffered considerable financial losses as a result of the Global
Financial Crisis, and
either cannot sell their individual lots to escape insurance-driven rises in Body
Corporate fees, or would be faced with selling at disastrous financial losses,
n investors who are
being driven away from investing in strata title schemes because of prospective
negative returns and rapidly increasing outgoings, resulting in:
-> a soft
rental market with high vacancy rates in some areas, and rent increases which
make properties unaffordable to those on lower incomes, and
property prices which negatively impacts the local economy.
The Committee has heard that for many people, concerns about
their future financial viability are having serious flow-on effects on their
psychological and social wellbeing.
For example, the Whitsunday Ratepayers Association comment that:
The effect these premiums are having on the community is being
under rated. Owners would sell and move out of Airlie if they could, but they
can’t as the units are unsaleable.
This is leading to welfare problems and mental anguish.
In some cases the younger owners are having to call on their
parents for help, putting additional pressure on the parents. In other cases it
is the older, retired person who is suffering:
Margaret Shaw was contacted by an 83 year old woman who was
in tears because for the first time in her life she couldn’t pay her debts. Her
body corporate fees had increased so much due to the insurance premiums she
just couldn’t do it. She wanted someone to listen to her for help. She refused
for her name to be given as she was more than embarrassed, she was humiliated.
People don’t deserve this.
A considerable number of the units are owned by self funded
retirees and their income is being affected. Self-funded retirees have to draw
down savings with No Means Of Achieving Any Additional Income. If this
continues there will be no choice but to make demands on the pension system if
costs cannot be afforded and sales take place at below purchase prices.
Pensioners who have to watch their expenditure carefully
cannot find the extra money and older people already suffering from depression
and anxiety are having their conditions made worse.
Some retirees are even contemplating returning to work as an
option to cover increased costs, but the jobs aren’t there for them.
SCA add that further concerns were raised during their consultations in
north Queensland in November 2011, including:
n Real estate
salespeople who said they could not ethically sell apartments as a viable
n Builders and other
tradespeople dealing with the impact of complete collapse of any new
strata-type construction activity, and
n Building executive
committees concerned about the long term effects of slashed maintenance
budgets, usually to help offset rising insurance costs, on the quality of life
of residents and asset values.
From the evidence provided to the Committee during this inquiry, it is
clear that the impacts of rising strata title premiums are severe and wide
ranging. Further, these impacts will be exacerbated by subsequent increases and
the flow-on effects to local economies will be substantial.
Taxing hardship – GST and Stamp Duty
It is obvious that if insurance premiums are increasing by anything up
to 500 or more percent annually, then any taxes applied as a percentage to those
premiums are also increasing the ultimate cost of premiums.
The government taxes and duties currently applied come on top of the
range of costs and assessed risks that make up the premiums charged by
insurance companies. The following chapter examines the proportional component
of premium costs, and how these factors contribute to setting the price of risk
that is passed onto policy holders as insurance premiums. Conflicting evidence
has been received as to how the price of some of these cost factors may have
changed, such as reinsurance, and this is discussed in more detail in the
While Government taxes and duties are not driving strata premium increases,
the Committee is aware that, in these times of financial hardship, they are a
burdensome additional contributor.
The GST is a tax of ten percent that applies to most goods and services
in Australia. The GST is collected by the Australian Government and then
distributed to the states and territories for the purpose of funding essential
services (such as education, health and public transport).
The GST is distributed using the principle of horizontal fiscal
equalisation. This means that it is the Australian Government’s responsibility
to ensure that each state and territory have the same fiscal capacity to
provide their residents with services of the same standard. However, ultimately
it is the states and territories who decide how they apportion these funds to
Stamp Duty is a tax that historically has been levied upon documents,
but now applies to various transactions and transfers. In Australia, Stamp
Duties are levied by the states and territories and the rates vary between
In Queensland the Stamp Duty charged on residential strata title
insurance (or ‘transfer duty’) is 7.5 percent of the premium paid. Stamp Duty
is charged after the GST has been applied to insurance premiums, with
cumulative charges representing a larger impost than the 17.5 percent of
SCA are concerned that these taxes heavily inflate the cost of strata
Both the Commonwealth (through GST collections) and the
states (through stamp duties) benefit significantly from the excessive levels
of taxation on certain insurance classes, including strata insurance. While
Queensland and Western Australia do not impose fire service levies that add
substantially to insurance costs in Victoria and New South Wales, they do
collect significant percentage based stamp duties. A major by-product of
runaway strata insurance costs has been a revenue windfall for both states as
well as the Commonwealth as these taxes inflate the cost of higher base
Other witnesses were concerned that the cumulative charging of Stamp
Duty and GST effectively imposed ‘cascading government taxes’
or ‘a tax on a tax’.
two taxes combine to add nearly one fifth to the actual premium cost. If
premiums are increasing by 100 percent, this amounts to a major increase in the
tax that is paid in actual dollars. If increases are in the magnitude of 500
percent, then the sum of the taxes and duties applied are close to the amount
of the original premium.
There is no doubt that, given the magnitude of premium increases for
strata title insurance in north Queensland, government taxes and duties are
contributing to people’s hardship.
The Committee recognises the financial strain that many are experiencing
as a result of the steep insurance premium increases for strata title
complexes. In addition, the Committee acknowledges the emotional stress this
brings, particularly for those who have been planning for retirement and have
limited resources to adjust to these changes of circumstances.
Already, there are indications that these premium rises are impacting on
the housing and rental market in the north Queensland region, and the economic
flow-on effects to communities will obviously become more apparent over the
While premium increases are occurring nationwide, the Committee
concludes from evidence received that those more severely impacted at this time
are strata title unit owners in north Queensland, and in particular in the area
north of the tropic of Capricorn. In many instances, these unit owners are now
in the second or third year of premium increases, with the most significant
increases occurring in current renewal policies.
Further, these unit owners are legally compelled to seek insurance
coverage and, with limited competition in the strata title insurance market in
north Queensland, they are in an untenable bind.
The Committee acknowledges that the GST and state government Stamp Duty
are charged as a percentage of insurance premiums. Consequently as premiums
have risen, so has the value of these taxes.
The Committee is aware that the Australian Government collects the GST
and then distributes it to the states and territories to fund essential
services. Any change to GST arrangements requires the unanimous support of all
states and territories.
Whilst the Committee recognises that it would be beneficial for parts of
Queensland to have a relaxation of the GST charged on residential strata title
insurance (particularly in areas north of the Tropic of Capricorn), it is
highly unlikely that all states and territories would agree since the benefits
of an exemption would only accrue to one region.
Moreover, the Australian Government has opposed narrow exemptions in the
past on the basis that they would set a precedent that might undermine the
overall tax base and intent of the GST. There have been a large number of other
worthy causes in the past that have sought exemptions and have been unsuccessful.
It is for these reasons that the Committee sees no merit in recommending an
exemption for residential strata title insurance from the GST.
Stamp Duty on strata title insurance is these locations is levied by the
Queensland government. Consequently it is beyond the scope of this Committee or
of the Australian Government to apply a moratorium on Queensland Stamp Duty
charges on strata title insurance.
However the Committee urges the Queensland government in the strongest
possible terms to apply a 12 month moratorium on Stamp Duty.
The Committee does not have access to data on the extent of increased
revenue the state government has received, which has resulted from the duties
applied to rising premiums. Consequently the Committee has not been able to
conduct economic modelling and assess the revenue impact of this recommended
Nevertheless, the Committee suggests that revenues over the last 12
months will have increased due to clear evidence of increased premiums. These
unintended gains may offset potential losses following the implementation of a
12 month moratorium on duties.
The Committee recommends that the moratorium be implemented at the
earliest opportunity and apply for the financial year 2012-13. The Committee
makes a number of recommendations in following chapters to investigate the
drivers of strata insurance costs in this area and to address the crisis
situation which has resulted.
In the longer term, the Committee considers that the course of action
set out in this report will assist in balancing the market and stemming the
trend of excessive strata title premium increases. However some measures will
take time to gain effect. Consequently the Committee recommends that this
moratorium be reviewed and extended by the Queensland Government for an
additional year if strata title premium increases continue at a substantially
higher rate than the average for general insurance.
As previously mentioned, Stamp Duty is a tax levied by State and Territory
governments. For strata title insurance in north Queensland, it is the Queensland
government who impose the Stamp Duty and it is not within the scope of this
Committee or the Australian Government to direct the Queensland Government to
reassess their Stamp Duty requirements.
Consequently, the Committee recommends that the Australian Government
liaise with the Queensland Government, and encourage that government to
implement a 12 month moratorium on Stamp Duty levied on strata insurance in
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.
To the insurance industry, the Committee notes that this recommended
measure is extraordinary and must not be seen as a precedent for the suspension
of taxes or duties in other areas.
The moratorium on Stamp Duty is recommended as a short term life buoy to
unit owners who are in severe financial stress. The measure is not designed in
any way to be of assistance to the insurance industry or to justify past or
future premium increases.
The following chapter considers the cost structure of insurance
premiums, prior to the application of any taxes or duties, and interrogates the
reasons suggested for the recent excessive price increases.