Strata insurance is growing in Australia as a result of more people living in multi-occupier buildings and properties across the county. However, there are a some key problems identified with strata insurance, including:
- strata managers commonly receive rebates of broker commissions and simultaneously brokers charge fees to owners’ corporations: both of these practices are confusing and controversial;
- affordability and availability of strata insurance are problematic for some segments of the strata insurance industry.
John Trowbridge, an insurance industry expert, was appointed by industry player Steadfast Group to investigate these issues.
Trowbridge has conducted Phase 1 on disclosure practices of insurance intermediaries, and Phase 2 on the remuneration of intermediaries and possible reforms. Phase 3 will follow looking at competition, affordability and availability of strata insurance.
The Phase 1 paper found that, where strata manager and broker are both involved, the unorthodox structure of the strata insurance market, which embraces a commission rebate/broker fee system, is confusing –
- it is convoluted because, frequently, part or all of the commission is paid to the strata manager and a separate broker fee is charged to remunerate the broker for the broker’s services: this is the commission rebate/broker fee system
- It is complicated because frequently not all of the commission is rebated to the strata manger, the remainder being retained by the broker.
- It is compounded in many cases by opaque or incomplete disclosure to the owners’ corporation of insurance-related transactions.
In response to this, the Phase 1 paper made recommendations including:
- Financial disclosures in the form of broker quotations and invoices be prepared by reference to standard templates
- Brokers and strata managers arrange to ensure timely transmission of quotations and invoices to the strata committee during the annual insurance renewal process
- Broker presentations of quotations be accompanied by a statement of scope of services by strata manager and broker and also by a description of how the strata manager and broker operate together
Recommendations were made to industry peak bodies to give effect to these recommendations through self-regulatory guidance notes or practice standards.
The Phase 2 paper found that there were two primary conflicts of interests regarding the commission rebate/broker fee system:
- The strata manager agrees on a share of commission with the broker—It is anomalous that, firstly, the strata manager arranges to receive a significant part of remuneration by agreement with the broker instead of with the owners corporation as client and, secondly, the strata manager’s remuneration is not related to the value of the services to be provided.
- The broker agrees on a broker fee with the strata manager that is additional to the commission—It is unsatisfactory that the broker gives away a significant part of commission and then enters into a second agreement to arrive at a broker fee that, in conjunction with any retained commission, funds the broker’s cost of services.
Recommendations are made to address problems with these issues through the proposed disclosure regime recommended in Phase 1. The report states that this would “bring the existing commission and fee arrangements into the open so that owners and strata managers can readily see and understand them”. It sets out a time frame for change over some years, noting that this “represents a deferral of remuneration reforms and should enable the new transparent disclosure regime to become bedded down before reforms are introduced”.
The papers can be found here.