The Unit Owners’ Stairway to Insurers’ Heaven
Strata insurance in Queensland is compulsory, and mostly about insuring the full replacement value
for the entire building.
Many unit owners in Queensland are now painfully aware they paid far too much for strata insurance in the years following the 2008/09 GFC.
Post-2009, construction costs virtually stagnated: in some years, they actually went backwards. (See ABS Index 6427.411 Building Construction – QLD
However, insurers continued suggesting annual uplifts of at least 5%; one insurer was even suggesting 8%.
The gap between actual
replacement cost and insured
replacement cost (i.e. the Building Sum Insured, or BSI) just kept growing. Many complexes were on a steep, and very expensive stairway to insurers’ heaven. (See David Leary’s article here)
One saving grace in Queensland is the requirement “the body corporate must, at least every 5 years, obtain an independent valuation stating the full replacement value of the building or buildings.”[ii]
Getting the fresh valuation every 5 years provides a safety check. (David Leary recommends even more frequent valuations, to avoid premium gouging through unrealistic annual uplifts.)
For most complexes, the following graph illustrates an all too familiar story:
Let us assume a complex is valued at $25M in 2009…the owners accept the annual 5% uplifts suggested by their insurer…by 2014, BSI would have risen to $31.9M… but a fresh Valuation in 2014 brings the BSI back to around $25M
In total, the owners over-insured their complex by about $13M, and paid excess premiums of around $10,000. Not good, but manageable: and the 2014 valuations sets them on the correct path for the next 5 years, hopefully more aware of the risk of incorrect annual uplifts.