Improving strata market capacity is a “clear priority” and could be tackled through a collaborative group involving the customer and insurance sides, consultant John Trowbridge says in the final report of an independent review.

Mr Trowbridge says the group could be a variation on the Insurance Council of Australia’s Business Advisory Council, which was set up to tackle difficult areas of commercial cover.

“The insurance industry, comprising insurers and underwriting agencies, is being urged to investigate, in collaboration with representatives of broking houses, strata management groups and owners’ corporations, what steps can be taken to alleviate the market capacity problem,” Mr Trowbridge says.

The report warns there’s no short answer or assured favourable outcome from the process and the competitive integrity of those involved would need to be protected, but the group could explore several steps that could lead to capacity increases.

The mainstream strata market, where there are good quality properties in low-risk locations, has already commonly seen price rises this year of about 20%, although not evenly across the market, it says.

In North Queensland, the market overall is disjointed and for properties exceeding $5 million in value there is very limited capacity, while relative rates per unit sum insured show sharp differences for properties in Cairns and Townsville compared to Brisbane.

The degree of alleviation from the government-backed cyclone reinsurance pool is yet to be fully understood, it says.

The paper draws attention to owners’ collective responsibilities for building maintenance and repairs, remediation of defects and other matters affecting insurance risk, and suggests the need for some form of educational opportunities.

“There are many examples of poor governance and poor functioning of the strata committee or owners’ corporation where funding, planning and decision making adversely affect building condition and hinder underwriting assessments,” it says.

The review of strata insurance practices, commissioned by Steadfast, has been completed in three phases, with the first focusing on implementing a disclosure regime and the second on potential remuneration reforms.

The report says there has been progress on improving disclosure transparency, with Strata Community Association in the process of preparing a professional practice standard for its members, while also engaging with the National Insurance Brokers Association (NIBA).

That action will be enhanced by the latest NIBA code of practice, which has introduced new transparency measures, it says.

Other topics addressed in the phase three report include the potential for greater transactional efficiencies and the potential benefits of strata insurance data collection, while it calls for greater choice of voluntary excesses.

The report points out that owners’ corporations have a legal obligation to obtain replacement cover, but underwriters leave it to them to provide an estimate and provide sum insured cover only.

“They also charge premiums linked to sums insured and, as a result, their premium scales effectively give the owners a financial incentive to under-insure,” it says. “This system is flawed as to both pricing and adequacy of cover. There has to be a better way.”

The paper adds another voice to calls for governments to remove or to reformulate stamp duty and, in NSW, to replace the emergency services levy with a more equitable funding model.

Phase 2 of the review had proposed that the commission rebate/broker fee system should be phased out in three stages via a structural realignment across this year and next.

“This view is not widely supported by strata managers or brokers as many of them wish to maintain existing practices despite the issues identified,” the latest report says.

In the absence of any regulation of intermediary charges, it becomes a matter for each owners’ corporation and its strata committee to challenge or negotiate with their strata manager and broker for a structure and levels of remuneration with which they are satisfied, it says.

The final phase three report is available here.