UOAQ Newsflash #17 - Missing Insurance Valuation
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Dear Subscriber,

We are often asked why we focus so much on strata insurance.  The simple answer is that this is where the money is.

One of the first things we suggest all new Building Members should look at is their strata insurance.

It is our experience that when owners are looking for big savings in the shortest time with the least effort on their part, strata insurance is the go-to area.

There are many risks with strata insurance… and one of the ‘biggies’ is not having valuations done at all.  And so often, it is simply because the owners are  not aware of the 5-Year Rule.

Here is just another example of a body corporate obtaining independent, professional support through the UOAQ, and getting itself back on the road to good governance with its strata insurance.

Wayne Stevens
President
Unit Owners Association of Queensland Inc.

WHO KNEW?  Some Insights into Strata Insurance

2.4: THE PERILS OF NOT HAVING VALUATION DONE WHEN REQUIRED

Q: Why does the UOAQ focus so much on strata insurance?
A: In a nutshell....this is where the money is.


It is our experience that when owners are looking for big savings in the shortest time with the least effort on their part, strata insurance is the go-to area.

And the known risks with strata insurance cover a broad spectrum:
  1. Valuations:  have they been done, regularly and correctly, by qualified professionals?
  2. Annual Uplifts between Valuations:  are they realistic?
  3. Annual Premiums:  are they competitive?
  4. Commissions:  are they rebated back to the owners?
So… whenever a body corporate approaches us about the benefits of UOAQ Building Membership, one of the things we suggest they first look at is their strata insurance arrangements.

This process starts with a review of their most recent AGM papers, and their last two insurance valuations.

The financial benefits of having had these insurance valuations done regularly, and properly, by independent and expert professionals, are very real.

The financial costs of not having had them done regularly and properly, or worse still not at all, are also very real.
 

And it is so easy to fall through the cracks.


A prospective UOAQ Building Member recently followed our advice to look at their last two valuations.

They discovered there had been no valuations done at all… at least, not for the last 12 years or so.
 
Seemingly, the owners had not been advised about the 5-Year Rule.

Experienced strata owners will know by now where this story is heading.

In the absence of these valuations, the body corporate’s insurer had recommended, through their Authorised Representative (the owners’ Body Corporate Manager) annual increases of at least 5% to the building’s insurance value.  The compounding effect of these annual increases, over a decade or more, was significant.

By 2016, the owners were insuring their building for more than $32,000,000, with an annual premium of approximately $30,000.

There were two risks here which called for closer examination:

i.    The insurance value of $32,000,000 seemed very high for their building.  

ii.    The annual premium of $30,000 which they were paying to their long-time incumbent insurer, at a rate of approximately $940 for every $1M of coverage, exceeded the current price in what is a very competitive market.

Relying on UOAQ’s recommendations, the owners approached two highly respected service providers in our strata world:

i.    Leary and Partners (Quantity Surveyors):  they produced a valuation report stating a new replacement value which was dramatically lower than $32,000,000.

ii.    Strata Insurance Solutions (Insurance Brokers):  they sourced quotes from a range of strata insurers, including the owners’ incumbent insurer, based on that new replacement value.
The most competitive quote, not from the incumbent insurer, came in substantially lower than $30,000.
A reduction in premiums was to be expected… premiums follow the replacement value.
But as so often happens when strata insurance is outsourced to an independent broker, the new insurer’s rate per $1M of cover was much lower than the incumbent’s.  
It really does pay to shop around

It is estimated that the owners had paid excess premiums of at least $100,000 over the last 10 years or so.  Much of this waste would have been avoided if the owners had been better informed.
 

The lessons here are threefold:


First:   Check your annual general meeting papers to ensure that they do disclose both the date when the last valuation was done, and the value of your building at that time.

This disclosure is mandated by the Body Corporate Community Management (BCCM) legislation.

Second:   Add 5 years to that date, just to make sure that the last valuation has not passed its use-by date.

Third:   Access the Australian Bureau of Statistics’ (ABS) ‘Index 6427.411 Building Construction – QLD’.*
This Index reports movement in QLD’s construction costs, quarter by quarter, dating from 1998.
 
It shows that these costs remained virtually static from 2009 until about 2014, with only slight increases from 2014 to 2015. Construction costs now seem to be on the rise again.

This Index will provide a general indication whether the annual uplifts being recommended by your insurer, in the intervening years between valuations, are consistent with actual movement in construction costs.

If you have any concerns, independent professional advice should be sought from an appropriately qualified valuer.
 
NB:  THIS INDEX CANNOT BE SUBSTITUTED FOR A PROFESSIONAL VALUATION.
 

* Australian Bureau of Statistics’ (ABS) ‘Index 6427.411 Building Construction – QLD’
http://www.abs.gov.au/ausstats/abs@.nsf/mf/6427.0 
Open this link, then:
1: Click on DOWNLOADS (see Menu Bar, 2nd from left)
then
2: Click on the green XLS button on Table 17: Output of the Construction Industries
then
3: Click on the blue series ID on Line 15: Construction QLD
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