Chapter 3 Decreasing risk and increasing market competition
Residential strata title insurance is becoming unaffordable for many
people, particularly in the north Queensland region. This situation will become
more critical if premium prices continue to rise.
A healthy strata title insurance market in north Queensland is reliant
on two factors – decreasing the assessed risk levels and increasing
market involvement to increase competition and disperse risk.
This chapter examines the following cost components that are factored into
assessing risk and subsequently setting premiums:
n natural peril risk,
n attritional claims,
n reinsurance, and
n operating costs and
In this chapter, the Committee considers how these components are priced
and the evidence given regarding which of these factors may be contributing to
price increases for strata title insurance. There are also characteristics of
strata title complexes which, insurers argue, increase their risk profile and
claim costs. These are discussed as costs specific to strata title insurance.
The Committee notes that much of this evidence is contradictory and
Alongside claims of increased risk exposure from insurers, unit holders
have cited the decreased competition in the north Queensland strata title
insurance market as a key reason for excessive premium increases.
This chapter examines the evidence the Committee has received relating
to these two arguments, and the actions required to address distortions in these
two drivers of premium price.
Assessing risk and setting premium prices
Evidence supplied by the ICA shows building insurance premiums are
comprised of five factors. The focus of this inquiry is on the proportions
assigned to natural peril risk (36 percent), attritional claims (30 percent),
and reinsurance costs (6 percent).
Figure 1 provides a breakdown of the typical building insurance premium
Figure 1 Insurance Council of Australia: typical
building insurance premium stack
submission 380, p.4.
In this figure, ‘natural peril risk’ refers to the risk of an event
occurring that would result in an insurer needing to pay out a large number of
claims (for example, as a result of a tropical cyclone or major flooding).
‘Attritional claims’ refer to the probability of regular, minor claims
on insurance policies.
‘Reinsurance costs’ refer to the cost of insurance that is taken out by
insurance companies. The main purpose of reinsurance is to transfer risk from
the insurer to the reinsurer. Typically, reinsurance companies are large
It should be noted that the premium stack breakdown is based on national
data and is not specific to the north Queensland area. Some insurers allege
that the Queensland market has a higher number of claims pay-outs than other
parts of the country, and that construction and repair costs are also higher
which results in increased claim costs.
The Committee did not investigate these allegations, although there is
some discussion of strata title claim frequency and reconstruction options to
reduce risk costs in Chapter Four of this report.
The following sections examine the three key cost components of the
premium stack, the methodologies for calculating these cost components, and the,
at times, contradictory evidence from the insurance industry regarding relative
increases to each of these cost components.
The cost of reinsurance and capital adequacy
Despite only contributing six percent to overall premiums, the
requirement for capital adequacy and rising costs of reinsurance were cited by
some as crucial factors contributing to dramatic increases in premium prices.
As mentioned in the preceding chapter, the main responsibility of APRA 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. This
means that, in the event of a major disaster event, insurers have adequate
capital to meet their responsibilities to policy-holders, whilst remaining
Insurers generally insure themselves against the risk of high levels of large
claims by buying reinsurance. Reinsurance helps insurers to meet their capital
adequacy requirements by passing on their risk to the reinsurer.
Mr Robert Whelan, CEO of the ICA, acknowledges the rises in strata title
insurance premiums but refuted suggestions that the pricing of premiums was not
soundly based. He refers to the highly regulated nature of insurance and the
capital requirements to cover risk as drivers of price increases:
we recognise that there have been significant increases in
residential strata insurance premiums. However, these increases have not
occurred on a speculative basis. Premiums are risk based and the practice for
prudently managing operations of an insurer is highly regulated in order to
avoid the risk of insurer failure. This regulation is administered by the
federal government through APRA who mandates levels of capital to be maintained
and risk management practices by insurers.
Zurich Financial Services Group (Zurich) remains one of the few insurers
still operating in the north Queensland strata title insurance market. In their
submission, Zurich claims that growth in the number of strata title properties
has been accompanied by decreased market involvement by other insurers which in
turn increases Zurich’s risk exposure. This lead to a 20 percent premium rise
Following the withdrawal of other insurers from the region,
Zurich’s strata property portfolio in North Queensland continued to grow in
late 2009 and throughout 2010. Due to the cost of capital associated with this
growth, and the poor performance of this portfolio, Zurich implemented a
further premium increase of 20% on 16 October 2010.
Increased risk exposure followed by recent Queensland disasters placed
further pressures on their obligations to meet capital adequacy requirements
for their underwritten risk. Zurich asserts that the required capital
allocation for strata title insurance in north Queensland is far in excess of
its capital requirements elsewhere in Australia.
Zurich claims that further premium price increases of around 300 percent
on average represent the recalculation of capital allocation based on capital
adequacy requirements. Zurich trace the bulk of premium price increases to
these drivers of price:
It has also been necessary for Zurich to allocate additional
capital against its exposure to catastrophes in North Queensland. Zurich’s
capital allocation for North Queensland strata business is 220%, driven by the
high volatility of catastrophe claims. This is more than double Zurich’s
capital allocation for strata insurance outside of Queensland.
As a result of a further review conducted in late 2010, the
increase in capital allocation to North Queensland strata business and further
increases in reinsurance costs, Zurich determined it would be necessary to
either cease offering its strata product in North Queensland or charge the
appropriate technical premium. The technical premium is the premium Zurich
needs to charge in order to cover all costs of supplying the product and
generate Zurich’s minimum required rate of return on capital. Once the
technical premium was calculated, it was determined that current premiums would
need to increase on average by 302% to implement the technical price.
Consequently, Zurich continues to offer insurance renewals to its
customers, but decided not to take on any new business in this portfolio.
CGU Insurance Limited (CGU) similarly argues that premium price rises
reflected cost rises in ensuring capital adequacy. Mr Brad Robson explained
that CGU is:
under very stringent prudential requirements to ensure we
have adequate capital available—the cost of capital has increased—so that we
are writing business in a sustainable fashion and can be here to pay and settle
A crucial element of insurers meeting their capital adequacy
requirements is their capacity to purchase reinsurance. The reinsurance market
is a global one and so the capacity of insurance companies operating in
Australian to seek reinsurance has been affected to some degree by
international catastrophes such as the recent tsunami in Japan and the
earthquakes in Christchurch, New Zealand.
Mr Whelan notes the impact of local disasters on the reinsurance market:
Reinsurance costs are also increasing due to the large number
of extreme weather catastrophes in recent years. As noted in our earlier
evidence to the committee in relation to claims handling, the extreme weather
events experienced around Australia in 2010-11, particularly
flooding in Queensland and Cyclone Yasi in Northern Queensland, flooding in
Victoria, severe storms in Victoria and bushfires in Western Australia, were
unprecedented in their scale and geographic spread. 
Mr Whelan indicates that these Australian disasters have occurred at the
similar time as a series of disasters in other countries. This has serious
implications for Australian insurers seeking reinsurance on a tight global
in 2011 alone there were catastrophic losses across the
planet totalling something of the order of $380 billion in economic loss. Of
that, something of the order of being in excess of $150 billion was borne by
the insurers, and that means largely the reinsurers—so in one year a $150
billion loss. That was contributed to in no small part by the sorts of
catastrophic events we experienced in Australia and New Zealand.
The consequences of these global costs, coupled with recent disasters
within Australia, are a changed risk profile and subsequently increased costs
of reinsurance. Mr Whelan claims that the increased premium costs to policy
holders reflected the increased reinsurance costs borne by insurers:
the reinsurance companies, on whom we rely to be able to
provide insurance to the insurance companies so that we can put product into
the marketplace, decided that they needed to review our risk profile as a
region and they substantially repriced their products to us, and that is what
How these reinsurance changes may have affected individual insurers will
be determined by their assessed risk exposure and involvement in different markets.
However, Mr Whelan claims that all insurers would have been significantly
affected by the reinsurance market and further increases could be expected.
Citing figures obtained from APRA, Mr Whelan comments that:
the costs of reinsurance to Australian insurers had increased
by at least 50 per cent. How that is factored into individual programs by
individual insurers is a very complex matter and that is a subject to be
addressed by individual insurers, but it is a significant increase and it is
not the end of the increase. 
Mr Raymond Pavey, a Townsville insurance broker, told the Committee that
he believes reinsurance costs were the most significant factor contributing to
strata premium increases. Mr Pavey claims that the north Queensland area was
particularly affected by this reinsurance loading:
Insurers who operate in North Queensland are penalised by
overseas reinsurance companies by way of a tropical storm zone premium loading.
The greater the percentage of the insurer's book of business held in North
Queensland the greater the premium loading they receive from their reinsurer.
So the insurers who continue to do business in North Queensland receive a
higher reinsurance loading. 
Mr Pavey also predicts that the situation could deteriorate if further
insurers withdrew from the north Queensland market as this would increase the
perceived risk exposure and, in turn, reinsurance costs for those that
The more insurers withdraw from the North Queensland market
the more lopsided the books of business become in terms of risk held in North
Queensland for the insurers who remain; consequently, the more costly it is for
those remaining insurers to do business in North Queensland—north Australia,
for that matter. Ultimately, this cost passes on to their North Queensland
Mr Pavey asserts that the best thing the Government could do to
ameliorate the problem of strata premium increases, is to attract insurers back
to the strata insurance market in north Queensland. Mr Pavey adds that this
would spread the exposure and allow insurers to reduce their ‘book of business
in Northern Queensland and should flow through to their reinsurance’. 
The issue of increased competition is discussed later in this chapter.
The cost of claims
The cost assessment of attritional claims is a ‘loading’ that reflects
the average amount typically paid out through claims made on this type of
insurance cover. Attritional costs can be influenced by the frequency of claims
in a region, the frequency of claims for a type of building, and the frequency
of claims for the particular building for which insurance is sought.
It was claimed that recent disasters in Queensland have increased
capital adequacy and reinsurance costs, and this is reflected in increased
premiums in these regions. However, it was also asserted that, as a region,
Queensland has historically had a higher claim rate than other parts of
The ICA provided the Committee with evidence that Queensland:
experiences significantly more claims than other states
compared to the contributions made into the national premium pool. In other
words, in the five years to June 2010, for all property classes, Queensland has
drawn some 25% of all national claims despite contributing around 15% of
premium into the national premium pool. By contrast, NSW, despite contributing
some 40% into the national claim pool, draws under 35% in national claims. 
Figure 2 Comparison
of each state’s percentage of gross premiums and percentage of gross incurred
claims for five years to June 2010
submission 380, p.4.
In addition to these increased regional pay-out rates, insurers
suggested that the attritional costs of strata title cover were often higher
than that for other types of residential insurance. They assert this is because
claim rates for these types of buildings were generally high and excess levels
were typically low.
Insurers assert that this has resulted in higher claim pay-out costs for
strata title policies than experienced with other types of residential housing
Zurich reports that across their policy holders, owners in residential
strata schemes generally carry lower excesses and make more frequent claims on
their policies than owners of houses:
Zurich’s experience on claims frequency on strata insurance
in North Queensland is around 30-40%. This means for every 100 customers, we
are getting 30-40 claims each year. In comparison, a personal lines home
building insurance portfolio generally runs at less than 10%.
Zurich cites ‘the main reason for such a high claims frequency in strata
insurance is historically low excesses’.
Zurich adds that:
Many strata managers and body corporate negotiate excess
payments as low as $100 for the entire strata complex, meaning the annual
premium can become very expensive. This is done by some strata managers so that
many small claims can be made during the year to help with the overall costs
associated with running a strata titled property. However using insurance to
cover general maintenance issues rather than responding to larger claims and
disaster events only puts upward pressure on insurance premiums. 
Similarly Mr Whelan describes the relationship between higher claims
frequency and low excesses as having a feedback effect on premium costs. He
suggests that strata schemes that have an ‘increased excess will reduce the
premium but it also reduces the claims which continue to feed back into
Mr Whelan asserts that policy holders need to be aware that they can
‘dial up’ their level of excess and ‘dial down’ their premiums. This serves to
‘prevent people putting in small claims which would build the constant claim
The ICA also put forward a number of recommendations to assist Body
Corporates in best determining appropriate excess levels and understanding how
claim frequency can impact on premium levels. These are discussed further in
The cost of natural peril
The ICA cites recent increases in the pricing of risk as being another
key driver of increases in residential strata title insurance. They assert that
natural peril risk makes up the largest proportion of insurance premiums and
that the profit margins for insurance companies are comparably small.
The main argument put forward by the insurance industry to explain the
recent significant increases in strata title premiums is that, in the past,
strata premiums in north Queensland have been underpriced.
Mr Whelan says that:
whilst there are a range of factors which have contributed to
these increases, fundamentally it is in the insurance market correcting
premiums in high-risk locations which have historically been heavily discounted
for risk. 
The ICA asserts that some unit owners were ‘paying less than a third of
technical risk prices’.
Mr Whelan defends the insurance industry’s past underpricing of risk
with the rationale that risk assessment is an ‘evolving science’. He explains
the whole pricing process, subject to risk, is an evolving
science, and it is based essentially on experience, which gets factored into
the overall risk assessment of individual locations and individual properties.
Mr Whelan concludes that recently increased premium prices for strata
title insurance now represent a more accurate assessment of risk, based on
natural perils and attrition claims. He asserts that premium increases are a
corrective to previous underpricing of risk; in effect, they are a realisation
based upon improved data:
[prices] are now starting to reflect the risk premium that is
associated with the risk assessments that have accumulated over a fairly long
period of time. 
While this was the view argued by the ICA, other insurers were not
consistent in the reasons they gave for underpricing risk in the past. Some insurers
conceded that, until relatively recently, competition for a burgeoning market
share led companies to heavily discount strata premiums, particularly in some
tropical zones like the north Queensland coast.
CGU concedes that market competition led to reduced pricing at one
point. However, CGU claims that this reduced pricing was not sustainable and
did not reflect the actual risk represented by strata title insurance coverage
in these areas. It was, they assert, an historic underpricing of risk driven in
part by the rapid growth in the strata title market:
The distribution of residential strata insurance in Northern
Australia, particularly in Far North Queensland, became increasingly
competitive a number of years ago in response to the rapid urban development in
this region. The growth in the number, size and density of strata developments
was, for a period, accompanied by an increase in the residential strata
insurance ‘capacity’ for this region.
This high level of competition, particularly when compared to
the distribution of strata insurance in southern Australia, led in some
sub-regions of Northern Australia to premium pricing at unsustainable levels.
Conversely, CGU deny that premiums were deliberately underpriced. Mr
Brad Robson suggests that underpricing resulted from insufficient data to
accurately price risk in the past, and the market is now experiencing the
necessary pricing adjustments:
Our product may have been underpriced but it was not
underpriced knowingly. That is a discovery process as you apply your actuarial
studies to your statistical performance combined with the reinsurance cost
factors that change together with the claims costs. There are inflationary
pressures put on claims costs with general repairs. A lot of buildings have
become more sophisticated in high-end asset values and there has been an
accumulation of buildings being built in coastal regions, which unfortunately
do bear the brunt of winds. It is those key factors that have contributed to
our discovery as we have looked at our pricing. The pricing was not adequate or
accurate to offset the risk of taking on that business.
So, on one hand insurers concede that, until relatively recently,
competition for business led to heavy discounting on strata policies, while on
the other they claim that risk assessment was inadequate or inaccurate in the
Costs specific to strata title insurance
The premium cost components considered above (the cost of natural peril,
the cost of attritional claims and the cost of reinsurance) are common to all
types of residential building insurance, though the proportions may vary
depending on type of building, region, scope of cover etc.
In relation to strata title insurance, the ICA argue that there exist
specific characteristics of strata title properties which increase their risk
profile and so the risk exposure for insurers.
The assessment of risk and the relative cost components as they apply to
any individual policy is obviously a complex and commercially sensitive
process. The ICA state that insurers employ actuarial experts so that they
price risk correctly and take into account many detailed factors to determine
For strata title properties, these factors may include the following:
n The estimated cost of
n reinsurance and
n management costs
n Broker costs
Building specific issues:
n The level of cover
requested and liability provisions
n Risks at the location
n The age of the
building and claims history
n Special limits on the
building such as heritage listings
n Building materials
and design used
n The number of units
and floors, floor space etc,
n Fire protection
systems and other mitigation present
n Presence of an onsite
manager or measures to lower claims frequency
n The number of pools,
car parks, lifts, etc
n The primary use of
the building, owner occupied, rental, commercial etc. 
Differences in these factors can result in different premiums applying
to strata title complexes which are in close proximity and or which may appear
to be of a similar value or size.
CGU state in their submission that there are distinct features of
residential strata title insurance that have ‘conspired to magnify recent
premium increases’. These include:
n The total value of a residential
strata building is higher than a home, so the scale of losses is potentially
n Concentration of risk
– as opposed to insuring 100 homes dispersed over a large area, a residential
strata building may represent 100 homes on a smaller square footage. If a storm
hits that particular area it could lead to a higher number of insurance claims
in terms of value and severity of damage, than if the risk was spread across a
broader geographical area.
n Clustering –
residential strata buildings are often clustered together in particular areas
of a town, which further exacerbates the concentration risk.
n Location –
residential strata buildings in Northern Australia are often along or near the
coastline and built for their sea views or holiday letting potential. This puts
them at higher risk of cyclone and storm damage than other properties located
n Repairs – costs are
influenced by availability to materials and labour. Major catastrophes can
result in a sharp rise in costs due to high demand. The engineering involved in
large residential strata complexes can require specialist attention unlike that
of traditional homes. This draws upon specialist skills that may not be readily
available within the local region further exacerbating the cost to repair.
Equally, in many cases the high value plant and equipment used for the
provision of services (water, electricity, air-conditioning, etc) in
residential strata complexes is centrally located in flood prone areas, such as
basements, significantly adding to the cost of repairs incurred in even minor
n Increases in
peripheral costs – residential strata policies provide temporary accommodation
costs to tenants in the event the premises is temporarily uninhabitable. This
cost is magnified with multi-tenanted risks, such as a 50 dwelling apartment
These factors, CGU assert, increase the risk exposure of those insurers
operating in the strata title market. While the natural peril risk may not be
higher than that of nearby residential standalone houses, the claim pay- out
costs potentially incurred by the insurer are likely to be substantially higher
in the event of a major damage to the area.
Regardless of these particular characteristics of strata title and recent
massive increases in premium prices, the ICA claim that premium increases do
not disadvantage strata title unit owners compared to standalone residential
house owners. They deny that strata insurance is unaffordable and assert that
it is on par with general insurance.
The ICA claim that despite recent premium increases:
Strata unit holders now pay the same or less than
householders. Strata title insurance in some areas of Australia has been
heavily discounted in the past, compared to the technical risk price. Recent
corrections to price, whilst very significant, now better reflect risk levels
and the cost of capital associated with providing cover. Strata title property
owners in high risk areas now (on average) pay a premium comparable or lower
than the premiums payable by owners of stand alone households.
Table 2 Comparison
of north Queensland average insurance rates: strata vs household property
Average Annual Premium Per Strata Unit ($)
Average Annual Premium Per Standalone House ($)
(with $500 excess)
submission 380, p.5.
The ICA provided the Committee with comparative data for average annual
premiums per strata unit and per standalone house at three locations in north
Queensland (reproduced in Table 2). The ICA included this information to show
that strata unit owners are, on average, ‘not currently disadvantaged compared
to their householder neighbours’.
Based on their comparative data, the ICA assert that:
The increase in strata title premiums have moved average
premium to sum insured ratios closer to parity with household property.
The ICA also refute that the square metre area covered by strata title
insurance is less than that for standalone houses, noting that many strata
title complexes have large common areas, with costly assets, more electrics,
amenities and infrastructure than is usually found in standalone residential
Despite these arguments from insurers, some unit owners express doubts
about the capacity of insurers to accurately assess risk. Mr Mark Beath, a unit
owner-resident from north Queensland, states that:
Only three insurers would provide quotes via our broker for
our building last year. The highest quote was more than 100% above the lowest.
There is an enormous disparity even between the two lowest bidders of approx.
For the previous year (2010) the highest of three quotes was
more than 40% above the lowest. Either that is a market failure or evidence of
extreme variance in risk assessment methodology by insurers?
Other anecdotal evidence was received regarding variations in premium
prices and discounting by insurance companies when challenged.
The Committee heard two main arguments put forward by insurers to
explain the extraordinary premium increases in strata title insurance in north
Queensland. Insurers have variously claimed that:
n increased reinsurance
costs have driven price rises, and/or
n price increases are a
result of past inadequate or inaccurate pricing of risk.
Based on information provided to the Committee by the ICA, reinsurance
costs make up only six percent of the overall average premium. The Committee
does not accept that fluctuations in costs within that range can fully explain
reported premium increases of above 500 percent.
If poor risk assessment in the past is the true reason for such drastic
readjustment, the Committee is astonished at the extent of these flawed past
practices. Given the enormity of these errors, the Committee struggles to place
confidence in current business practices and risk methodologies.
The Committee is of the view that the whole point of insurance is the
capacity for a company to carefully assess the cost of the risk that they
underwrite and then to calculate premiums accordingly. If companies have failed
so completely in assessing the risk in the past, then it is difficult to have
faith in their capacity to accurately calculate the current risk that is
supposedly driving premium increases.
The Committee heard anecdotal evidence about the disparity in premiums
prices quoted from different companies, including evidence suggesting that
insurance companies were able to drastically reduce their quoted rates for premiums
when challenged over prices. In some instances, policy premiums were reported
to be reduced by between $30 000 and $50 000 with no change in other policy
conditions or excess levels.
This suggests either a lack of sound methodology being applied to
initial risk assessments, or that price points have been heavily inflated above
the cost of the assessed risk (and hence the capacity to provide huge
The Committee presents no view as to how or why these reductions are possible
and did not attempt to gather evidence on this given the urgency of this
inquiry. While the Committee is thankful that some strata title holders were
able to benefit from these reductions, the Committee expresses its grave
concerns regarding these business practices and its subsequent concern for
those who did not challenge the first quoted premium and who may not have
The Committee considers that suggestions of either price inflation or a
lack of methodology adds weight to the urgent need for a review of risk pricing
The Committee recommends that the Australian Prudential
Regulatory Authority conduct a review of the risk assessment methodologies
used by insurance companies to accurately price risk for strata title
The review should particularly focus on strata insurance
premium calculations in north Queensland in the last five years to determine
whether the major driver for premium increases was:
failure to consider changes in building codes,
costs of reinsurance,
inaccurate or inadequate assessment and pricing of risk, or
result of market forces, including heavy discounting.
This review should be completed by 1 October 2012 and
provided to the Minister for Financial Services and the Australian
Competition and Consumer Commission to determine if further investigation is
Market involvement and competition
Evidence was given that over the last five years there has been a
decline in the number of insurance companies providing strata title insurance
in the north Queensland area.
The Owners Corporation Network (OCN) notes that ‘there are currently
only four core strata insurance providers’ in north Queensland and that other
insurers ‘have withdrawn from the market due to insufficient premium base.’
The exit from the market of many insurers has forced some Body
Corporates to change insurance companies, and others have been unable to seek
alternative quotes for insurance cover and have been forced to accept the
prices set by the one or two insurers remaining in the market.
This, in itself, is not evidence of any price fixing or price inflation.
However, there is certainly an absence of evidence of robust market
Successive Australian governments have been committed for several years
now to a free market approach to general insurance. While regulating the
industry and ensuring oversight of financial practices, governments have not
intervened in setting premium pricing or assessing risk.
In other types of insurance and in other localities there are a number
of insurers providing a competitive range of residential home, contents,
vehicle and other forms of insurance. Given the lack of evidence received
regarding strata title insurance outside of the Queensland area, the Committee
assumes that a robust strata title insurance market exists elsewhere with
premiums that are considered affordable by unit holders.
When a free market fails to operate effectively and service public need,
it is for governments to investigate the existence and cause of distorting
factors. In this instance, a lack of robust market competition is particularly
troubling given the mandatory requirement for strata title insurance and recent
excessive premium increases.
While strata title insurance is mandatory in all states and territories,
the issue of rising premiums and lack of competition seems confined to the north
Queensland market. Clearly insurance companies are choosing to have a presence
where risk profiles are considered lower. This is creating regional inequities
with robust markets operating in some areas, and excessive premiums with
limited or no insurance choices in others.
There is currently no obligation for an insurance company that provides
certain insurance cover in one region, to offer this cover to all areas of
Australia. Consequently, while legislation requires residential strata title
insurance (and so ensures that there is a demand created for residential strata
title insurance), there is no requirement for insurance companies to offer
residential strata title insurance. Therefore, there is no regulatory
requirement that ensures the supply of affordable insurance in all areas of
Many witnesses claim there is a failure in the strata title insurance
market in north Queensland. Several assert that this lack of competition is
creating monopolistic conditions in the marketplace and contributing to price
For example, Mr Matthew Blackmore, an owner-resident of an apartment in
Cairns, expresses his frustration that only one insurer was prepared to quote
for his strata title complex, and they were forced to accept the dramatic
premium increases dictated by this insurer:
There is unquestionably market failure for body corporate
insurance in northern Australia as evidenced by the fact that only one
insurance company was willing to quote for our building. I made numerous
attempts to identify other insurers, as did our current insurance broker. The
legislative requirement for bodies corporate to take out building and other
related insurance has created a monopoly of sorts, where one insurer is able to
command premium increases of around 400% in 2 years.
Similarly Mr Beath argues that a market failure exists for tropical
strata insurance. He notes that:
this is evident in the failure of increased prices to attract
entrants. In fact insurers have withdrawn from the market as prices have been
The Committee heard evidence from insurance brokers who also suggest the
north Queensland situation was indicative of a market failure. For example, Mr
Pavey said that ‘there has been a market failure in north Queensland’.
Similarly, Mr Dallas Booth CEO of the National Insurance Brokers
Associated (NIBA) conceded that ‘there is market capacity, but it clearly is limited
and the market is struggling at the present time’.
Mr Booth added that ‘I cannot deny that it is getting very close to market
SCA outlines how prices had increased with the withdrawal of other
insurers from the market:
The quantum leap in prices in 2010 and 2011 was clearly
associated with a collapse in competitive tension in the tropical insurance
market. Some insurers withdrew altogether while others would quote for renewals
and not new business.
SCA notes this has enabled the remaining companies to select business
and the consequence is that some older buildings struggle to secure the
insurance coverage required of them by law:
By late 2011 there was effectively only one major insurer
taking new business other than on a highly selective basis. Even then, this
insurer drew the line at some of the risks seen to be at the higher end of the
spectrum, such as buildings on resort islands and older (pre-1980s) buildings
which may not meet current cyclone standards. These have been effectively
Other evidence suggests that limits placed on available cover are a
serious issue and give weight to the notion of market failure. Several
submissions and witnesses referred to seeking quotes from companies and being
refused cover. For example:
n A strata complex was
refused cover because the company only insures ‘up to $5 million and they do
not have a catastrophe allowance.’
n Anecdotal evidence of
one Standard Format Plan registered as a community titled scheme under the BCCM
Act that was unable to secure cover for the whole property because the
buildings were made of timber and were holiday let. The owners were forced to
make their own insurance arrangements, however the common property was
Several witnesses also express their concern that Body Corporates are no
longer able to obtain flood insurance in north Queensland.
OCN argues that this situation goes beyond market failure and is a
complete system failure. OCN assert that:
The aim of strata title insurance is to provide comprehensive
protection against risks to which the Owners Corporation is exposed. A
successful market operation in the area implies that choices by well informed
consumers, that is, executive committees, result in effective protection for
strata plans at the least cost.
In OCN’s view this is not the case and a state of affairs
exists which is best described not merely as market failure but as system
OCN describe the lack of competition for strata insurance and how this
was impacting pricing policies for strata title insurance. OCN also suggest
that this is also resulting in a poor insurance product being offered:
This lack of competition adversely impacts the cost of strata
insurance via inefficiencies and inflated premiums. Without an incentive to
price products more keenly, the cover offered tends to be ‘one size fits all’
resulting in inflated premiums as well as, in many cases, underinsurance in
such areas as machinery breakdown, public liability, and office bearer’s cover. 
Mr Graham Janz, a unit owner from Cairns, calls for urgent government
intervention because of ‘crippling increases’ in insurance premiums:
Despite all of the demand for residential strata insurance,
the complete absence of other insurers in supplying insurance to bodies
corporate in renowned cyclone-prone areas where the building sum insured
exceeds $20 million over the last two years reveals the need for government
intervention in the market to alleviate the crippling increases in insurance
costs which are rising exponentially.
However, Mr Pavey reacts to calls for government intervention or a government
insurance company, suggesting this would only exacerbate the market failure and
concentrate risk on one insurer. He argues that the ACCC needs to investigate
how and why the market failure had occurred in north Queensland. 
Mr Pavey suggests that the only viable solution to address premium
increases is to increase competition in the market, which spreads the exposure:
Ultimately, if you set up a government insurance company it
is going to be the only one operating in the market because everybody will
insure with it. That company will eventually face the same pressures as the
other insurers. When you have one insurer in the market, it has all the
exposure and it will attract higher reinsurance premiums. The only solution is
Territory Insurance Office
The Committee heard evidence that the only state-owned general insurance
company in the country, the Territory Insurance Office (TIO), provides a model
of best practice for servicing a strata insurance market.
SCA comments that the TIO is able to deliver a well-priced insurance
product to the strata title market in the Northern Territory:
While strata insurance remains expensive relative to southern
capitals, it continues to be quoted at levels well below those now on offer in
north Queensland and northern WA and with no material recent changes in price
levels or restrictions on coverage.
In most respects the TIO mirrors the State insurance offices
that in every other instance have been privatised in recent decades. On
occasions the Northern Territory Government has considered and rejected the
option of a similar privatisation because of concerns about the impact on
availability and affordability of insurance in the NT. Based on recent
experience in strata insurance the rest of tropical Australia, it would appear
these concerns were well founded.
Mr Mark Lever from SCA remarks that data he obtained shows that strata
insurance premiums in north Queensland are two to three times the cost of
premiums being charged in Darwin, despite the city being similarly exposed to
Mr Lever suggests that the TIO is shielded from increasing
capital-servicing and reinsurance costs by the Northern Territory government.
In correspondence received by the Committee, the Chief Executive, Mr
Richard Harding, outright rejects claims that the TIO is immune from market
forces. While acknowledging that the TIO is a statutory corporation owned by
the Northern Territory government, Mr Harding stresses that the TIO is subject
to standards and capital management practices comparable to those that APRA requires
of other insurers in the market:
TIO must comply with a prudential standard regime that
closely mirrors relevant Australian Prudential Regulation Authority (APRA)
prudential standards, including its capital management practices. 
Mr Harding also states that the TIO experiences the same market
conditions as other insurers, including recent pressures of reinsurance and
exposure to risk. These factors dictate its premium pricing:
In addition to TIO being subject to the above prudential requirements
it also experiences reinsurance capacity constraints and expenses equivalent to
other insurers in the industry. TIO's pricing is a factor of claims history,
reinsurance costs, and the exposure and nature of the risk, and the application
of a commercial return on capital which is the same approach as other
Mr Harding explains that the differences in premium pricing results from
regional differences, and how these impact on attritional and natural peril
costs. Pricing differences between the Northern Territory and north Queensland
cannot be attributed to any shielding of the TIO from market conditions or by
more favourable operating conditions. Mr Harding emphasises that:
TIO's mandate is to operate in the Northern Territory
insurance market on a fully commercial basis, like for like with other
Australian Reinsurance Pool Corporation
Some submitters raise the establishment of the Australian Reinsurance
Pool Corporation (ARPC) as an analogous situation of the existence of an
insurance market failure, and subsequent remedial action taken by the Australian
Prior to the September 11 2001 terrorist attacks in the United States, Australian
insurance companies were able to reinsure their insured risk in the event of a
terrorist attack. However, following the terrorist attacks, global reinsurance
companies withdrew from the market.
In the absence of reinsurance, Australian insurers could not provide
insurance for terrorism risk.
In 2002 the Australian Treasury commissioned a review into the
availability of terrorism insurance in Australia. This review found that there
was no terrorism-related cover available for commercial property and business interruption.
As a result of this review, in 2003 the Australian Government intervened
in the market to establish a scheme for replacement terrorism insurance
coverage (namely, the ARPC). The ARPC was intended as a stop-gap measure to
correct an immediate market failure that had serious implications for the Australian
The viability of the ARPC is required to be reviewed every three years
by Treasury. The latest review was conducted in 2009 and found that the ARPC was
still necessary because it is unlikely that the private sector can provide
terrorism insurance in the near future. Moreover, the availability of insurance
and reinsurance was further depleted by the Global Financial Crisis in 2008.
The review highlighted the fundamental need for private sector
involvement, recommending that the Australian Government withdraw from the
market once private insurers can offer terrorism insurance on reasonable terms.
Mr Whelan describes the intervention of the Australian Government to
address market failure and establish the ARPC:
The terrorism pool was established due to actual market
failure. After the 9-11 events in America, the availability of insurance for
terrorist attacks evaporated globally, so there was no available cover. To
replace that available cover in the marketplace, the government intervened and
created the pool, which is funded to a large extent by a levy charged against
insurance policyholders on certain types of property. The pool has grown and it
has a stipulated requirement to build its reserves and its reinsurance
capability to a certain level to cope with the potential of a major terrorist
attack against Australia. All of that is in place. 
While the ARPC was established to provide terrorism reinsurance for
commercial buildings, a number of strata title complexes comprise a mix of
commercial and residential occupancy. Depending on the composition, some are
eligible for ARPC reinsurance coverage, while others must seek terrorism
insurance through commercial markets.
In correspondence received by the Committee, the CEO of the ARPC, Mr
David Matcham explains that:
Residential buildings are generally covered for terrorism
risk in commercial reinsurance arrangements however the general rule is that residential
buildings with more than 20% of commercial use and buildings valued in excess
of $50M are excluded.
The ARPC scheme provides insurers with a contract of
reinsurance covering terrorism risk for commercial buildings. Where buildings
are mixed use (commercial and residential), cover is available from ARPC if
50%or more of the building is turned over to commercial use. 
Mr Matcham notes the gaps available in cover for mixed commercial and
residential strata title complexes. He indicates that this had been considered
in the 2009 review, although the conclusion was that the current ARPC guidelines
should remain unchanged. Mr Matcham advises that a further review is being conducted
to examine the gaps in available cover. 
OCN argues that the gaps in available cover for terrorism reinsurance
are a ‘glaring failure in the residential strata arena’:
There are now many buildings in major Australian cities which
have been converted from commercial to residential use. It is an anomaly that
these residential (or predominantly residential) buildings do not qualify for
participation in the government’s terrorism coverage scheme. The building site,
exposure and risks remain essentially the same as the former commercial
OCN goes on to add that the market failure is this area is significant
with potentially serious consequences:
Meaningful terrorism insurance is not available through local
insurers following the withdrawal of Affiliated FM, a US based company, from
the market. It can be separately purchased through Lloyds but the cost is
prohibitive. If it is accepted that strata insurance should provide
comprehensive cover for risk to which the Owner’s Corporations (OCs) may be
exposed, then lack of terrorism coverage renders such policies in effect not
In addition to concerns regarding the gaps in cover for some strata
title complexes, the Committee heard calls for an expansion of the ARPC to
provide general reinsurance for insured residential strata title risk.
Poor pricing practices leading to market readjustments, and increased
risk exposure of strata title complexes, were cited as key reasons for the
recent dramatic increases in premium prices. Evidence of poor market conditions
leading to little or no competition was also cited as a reason for the dramatic
increases in premium prices.
The Committee agrees that the current strata title insurance market in
north Queensland is characterised by monopolistic conditions and market
failure. The Committee does not conclude from this that anticompetitive,
monopolistic or collusive behaviour is or has taken place in the market.
However, it is clearly not a robust market that encourages efficiencies
or competitive pricing. In addition, the concentration of insurers in this
market obviously focuses their exposure to risk, exacerbating high costs and
the lack of choice or competition.
The Committee recognises that the TIO is able to provide strata title
insurance to service the Northern Territory market at a lower cost than private
insurers in north Queensland as a consequence of market characteristics. The
Committee sees no merit in the Australian Government entering the market for
strata insurance, nor can it recommend that the Queensland government do the
Several submitters told the Committee how they had approached the ACCC
to investigate the affordability of strata title insurance in the area. The
Committee viewed some of the responses received by those submitters from the
ACCC and noted that the agency has been reluctant to do so.
The Committee considers that the responses from the ACCC were unhelpful,
almost formulaic letters, which added to the frustration and stress of
individuals facing the fear of ever-increasing insurance premiums.
The Committee recognises that the ACCC cannot make rulings about whether
strata title insurance premiums are accurately set, or if prices are inflated
or have been historically set too low. The Committee acknowledges that those
writing to the ACCC may not have grasped the exact jurisdiction of the ACCC.
Accordingly, when those writing to the ACCC requested that it investigate the
price increases, the response of the ACCC (that they were not able to assist)
was technically correct.
However, as a statutory authority with a public service duty, the
Committee considers the tone of some of the responses to be inappropriate –
namely some responses were bureaucratic, unhelpful and dismissive.
The Committee admonishes the ACCC for this type of response and for not
seeking to raise the issue with other more appropriate agencies, or to refer it
to the Minister for his information and action.
While not able to investigate the price setting of strata title
insurance premiums, the ACCC has the authority to investigate the cost drivers,
market conditions and relative profitability of the strata insurance market.
The Committee is aware that the ACCC conducted extensive reviews into
the general insurance industry following shifts in the market and premium increases
as a consequence of the September 11 terrorist attacks and the collapse of HIH.
The Committee is of the view that a similar review of the strata
insurance market is warranted, given the magnitude of premium increases in
recent years. The Committee notes that insurers offered to provide to the
Committee confidential information on their market profitability and relative
The Committee thanks insurers for their willingness to make available
this sensitive information and trusts they will extend the same cooperation to any
investigation conducted by the ACCC.
The Committee recommends that the Australian Competition and
Consumer Commission conduct a review to identify the cost drivers, relative
profitability and competition in the strata title insurance industry with a
focus on the north Queensland market. This review should be completed by 1
The Committee recommends that the Australian Government
investigate the feasibility of requiring insurance companies which provide
types of mandated insurance (such as residential strata title) to offer this
type of cover to all regions of Australia as part of their permit to operate
The Committee further recommends that this investigation
take into account the methodology for risk assessment and pricing for
mandatory strata title insurance and how this pricing is applied equitably
throughout regions of Australia.
This investigation should be completed by 1 October 2012 and
provided to the Minister for Financial Services.
The Committee did not receive evidence quantifying the terrorism risk to
residential strata title buildings and how this may impact premium prices.
However, the Committee expresses some concern that residential strata
title buildings are excluded from being reinsured by the ARPC. The Committee
queries whether the current proportions of residential/commercial use of a
building that qualify/disqualify it for reinsurance under the ARPC remain
appropriate given the growth of strata title complexes, particularly in coastal
holiday and metropolitan areas.
Given that strata buildings in some locations may face similar levels of
terrorism risk as commercial buildings, the Committee is of the view that a
reassessment is required. The Committee is aware that any expansion of the
reinsurance pool to cover terrorism reinsurance for residential strata title or
general insurance risk has serious implications for the Commonwealth.
Further, the ICA has indicated that the average reinsurance component of
insurance premiums is around six percent. Given that this inquiry was
instigated because of reports of premium increases in the order of hundreds of
percentage points, the Committee is not convinced that terrorism reinsurance
represents the most significant component of the problem.
However, the Committee feels that any measures that may limit premium
increases warrant further investigation with an analysis of any possible
reductions that may be applied to premium prices.