'Perplexing and convoluted': report makes case for strata reform
With more Australians living in apartment complexes and plenty of issues affecting buildings and insurance, the last thing owners need is convoluted practices that are so opaque that they leave the door open to questionable practices.
Strata is unusual given there are mostly two intermediaries, the broker and the strata manager, while client owners corporations, or body corporates as they are also known, often have little understanding of who is being paid how much for what services.
Consultant John Trowbridge in his Independent Review of Strata Insurance Practices says with almost no exceptions, all lot owners and other consumer representatives that have made submissions have expressed dissatisfaction not only with poor disclosure but also with the convoluted nature of the current system.
“The optics of the system, irrespective of its merits, whereby brokers receive revenue from two sources (a commission from the underwriter and fee from the client), then remit a major part of the commission to the strata manager, are perplexing to say the least,” he says.
Models that are more straightforward also operate in the market, but the report recommends phasing out the most commonly used commission rebate/broker fee system, which Mr Trowbridge says presents inherent conflicts of interest.
Complex arrangements reflect strata growth and other changes, such as an NSW requirement for managers to obtain three insurance quotes each year. A buying system that started without brokers has changed to one where they are involved in some 80% of the market.
When brokers were first involved, it was typical for them to rebate 10% to 15% of the commission to the strata manager and retain the other 5% to 10% for themselves, the report says.
But in the commission rebate/broker fee system, a practice has developed where the broker generally passes most or all of the commission to the strata manager and then charges a broker fee to the owners through the strata manager to cover its cost of services.
“In these cases, the broker fee is material and may be as high as the commission itself, which is typically 20% of the premium,” the report says.
As a result, total intermediary charges including commission are typically in the range 25% to 35% of base premium while some reach or exceed 40%.
The report says a recent variation involves a commission and fee paid to a third-party venture, owned by the strata manager or broker or both, which pays out periodically, and which is even less clear to the lot owner clients.
Where commissions and fees are agreed between the strata manager and broker, it’s rare for the actual lot owners to be involved, despite the fact that they pay the fee and are the insurance clients, creating an environment that presents inherent conflicts of interest, the report says.
The report looks at a couple of alternative models, including an arrangement where brokers dispense with the fees but retain sufficient commission for their own remuneration, while rebating a portion to the strata manager for referral or services rendered in support of the broker.
The strata managers would then need to go directly to the owners committee for any additional charges and could include fees for insurance services as part of their overall agreed services fees to the lot owners.
Another option, already in use in the market, is a single fee model with no commissions where the broker and strata manager agree on an aggregate fee to be approved by the owners, which is then split and allocated, while under a dual fee model separate fees involve “no behind the scenes sharing”.
Mr Trowbridge recommends that strata managers and brokers now using the commission rebate/broker fee system prepare to make the transition to one of the preferred models.
He recommends that they prepare for the changes next year and implement the new arrangements through the 2024 and 2025 renewal cycles.
Strata Insurance Solutions Practice Manager Tyrone Shandiman says commissions to strata managers have always been contentious and some actions in the past, where fee and commission arrangements were changed to benefit intermediaries during the softer market without disclosure, have tarnished the reputation of the industry.
“The recommended commission-only remuneration structures in the report seeks to limit the of discretion a broker and strata manager has on the level of remuneration they take,” he says. “This would provide better protection to consumers from practices where policies are placed with brokers that charge the highest remunerations only to benefit the strata manager.”
Mr Shandiman says Strata Insurance Solutions doesn’t pay commissions to strata managers, while he suggests changes to the report’s recommended disclosure improvement proposals to better reflect the buying process.
In the report Mr Trowbridge acknowledges potential benefits put forward for maintaining current arrangements, including that disclosure initiatives may limit conflicts and should be given time to work.
A certain market stability has also emerged and the current system delivers efficiencies in many cases in the appointment of brokers and in the collaboration between strata managers and brokers that generally deliver good insurance outcomes.
Ultimately though, he takes the view that the conflicts of interest can’t be satisfactory managed, and steps should be taken to phase out the source of the conflicts, which is the “convolution of the commission rebate/broker fee system”.
The independent Trowbridge review is underway as strata cover affordability and available concerns are particularly a concern in Northern Australia and as issues more generally around transparency and consumer understanding of insurance remain firmly in focus.
The extent to which recommendations are adopted remains to be seen, but more clarity can only be a benefit as the industry looks to get on the front foot and address insurance issues affecting apartment owners – before governments and regulators decide it’s time for further action.
