Fine line between strata risk and reward

Strata resilience

Underpricing in the strata market is threatening the sector’s sustainability, says a major insurer.

Zurich Australia’s SME Underwriting Head Peter Jones says the market is being distorted and needs to correct its pricing or risk a significant impact to availability and affordability.

“Even allowing for diversification, all insurers are underpricing catastrophe exposure for residential strata,” he says.

Jones says part of the problem is the fact that most residential strata insurance is being written by underwriting agencies, leading to less scrutiny on actuarially-based pricing and underwriting governance.

He says climate change is causing more frequent and more damaging events and premiums are not reflecting this, or the risk of earthquake.

“What if we had an earthquake in Sydney and suddenly the industry realised we haven’t been charging enough for this cover?” he says.

“That would put the pressure on pricing and they’d be a knee-jerk reaction with premium increases. Zurich believes we should be looking at a more sustainable solution for pricing residential strata than the short-term ‘match the market’.”

CHU General Manager David Hampton says competition in the strata market is very healthy and the recent benign claims environment has improved the short-term position.

“We are currently seeing lower pricing in the market as participants compete for business,” he says.

“This is primarily driven by the lack of catastrophe activity though lower reinsurance costs are also contributing to this.

“The concern is that this pricing is at the expense of managed underwriting and could create significant issues for lot owners, strata managers and underwriters if there is volatility or short-term market participation.”

Longitude Insurance General Manager Gordon Bell says the short-term philosophy of some insurers would impact the sector’s sustainability.

“Long term viability is not only dependent on sustainable pricing but also the pursuit of sustainable socio-economic community outcomes,” he says.

“An integral part of this is the ability to restore communities to their full state prior to the insurable loss.

“The sector needs quality players who are it for the long haul i.e. focused on the long term and current needs of the bodies corporate,” he says.