Insurance Commission what is standard?

At least he/she is transparent about their fee structure.  It isn’t illegal, and to me it is better they disclose it upfront. 

There are no doubt other views, but insurance commission is frequently built into the strata manager’s fee structure, and represents part of their overall fee.  What i mean by that is that if they didn’t receive that commission, then they would have to increase their fees elsewhere.  What you need to look at is the overall fee structure, and the services you are getting for that.  Cheaper is not necessarily better.

Cosmo said

Our OC self manages and has insurance through a broker. The broker gets a commission of 20% but it doesn’t cost the OC anything. The commission coming from the insurer profit margin.

I believe the “industry standard” is 20% shared between the broker and the Strata Manager. Of course, some (most?) Strata Managers have set up their own brokerage company, so in effect they get the lot.

There is no such thing as a free lunch.

If you think the insurer hasn’t inflated the real premium by 20% so that they can pay the broker and still make a decent (indecent?) profit, then think again.

When insurers tell you “it doesn’t cost you anything, we pay it out of our profit”, what they mean is “if you bypass the broker and deal  with us directly, we’ll still charge you the same premium”.

A decade or so ago, we actually had a (mostly) honest Strata Manager, whose policy was to credit clients with any brokerage he received.

@Kangaroo said:

When insurers tell you “it doesn’t cost you anything, we pay it out of our profit”, what they mean is “if you bypass the broker and deal  with us directly, we’ll still charge you the same premium”.

Kangaroo yes you are totally correct.  I probably should have expressed myself a bit clearer. In the case of our OC we had dealt with the same insurer for 10 years and then switched to a broker. So we kept the same policy, cover and paid the same amount.  

Prior to engaging the broker we had made 2 claims in 10 years and had experienced difficulties when claiming. Since engaging the broker we have made one claim and it went very smoothly.

I totally agree that extra transparency is required.

Insurers should offer a lower premium for direct (non-broker) policies.

SMs should credit their share of the commission to the strata, and not cross subsidise low management fees by insurance commissions.

But, if they can’t do that, at least they should show the commission in the Income and take it straight out again in the Expenses, like they do with Certificate Fees and Inspection Fees.

Why don’t they?

Because owners would start asking questions about such a large amount when all the SM does is pay the annual premium invoice from the owners’ funds.

And submit claims when required, but that’s part of their job.

Good information as always Jimmy!

To reiterate though, I wasn’t in any way suggesting that our Plan’s last Strata Managers didn’t disclose their commission from our insurers; the percentage was clearly shown in the schedule attached to our Agency Agreement.

I don’t accept however that any Strata Manager (large or small) who now receives such a commission would be would reducing their current management fee by an equivalent amount. Although I can foresee the management fee increasing by that equivalent amount should the managers’ commission at some time be removed. 

When I find a broker who will do the right thing by at least sharing their insurance commission 50:50 with our Owners Corporation, I’ll happily provide the details to Jimmy (I have until 12/12/13).

As an additional inquiry to Willie’s question; if the EC take the insurance admin (& commission) away from the SM and appoint a broker, can we still have the notices sent via the SM?

I have done a lot of research in this area and I would like to set the records straight regarding the flow on effect if strata managers are prohibited from receiving insurance commissions.

I would like to point out an erroneous assumption.. That is, that the insurance premium will reduce if there is no payment of commission to a strata manager – the premium will remain the same. The owners corporation will still have to pay the same amount for the premium but the strata manager will increase their fees to offset the loss of income. The service fees, in some instance, could even be more than the amount the commission would have been,

There are also several unintended consequences if insurance commissions are prohibited:
. additional expense to lot owners (increased levies) and increased rent for tenants
. loss of jobs – several smaller strata companies would be forced to close due to the loss of revenue
. reduction in competition in the marketplace due to closure of many smaller companies resulting in
larger strata management companies having a larger percentage of the market – reducing the amount of choice
available to owners corporations

A disclosure is required under the Property Stock & Business Agents Act if any commission is received. This is usually contained in the Strata Managing Agency Agreement, a copy of which is served on the owners corporation. There is full disclosure and the owners corporation is made fully aware of this.

Provided there is full disclosure there is no issue – but I feel if the receipt of insurance commission to the strata managers is prohibited – all round, nobody wins!!

bye for now,
Strataman

Dear Whale & other readers,

I am a (proud) Owner of Strata, and I would like to offer a few comments from my 30+ experience in the Insurance Industry.

Your assert that the insurance and strata industries are peddling the same line that Strataman espouses. Have you considered that this is because it could be somewhat accurate, and maybe some merit behind the points made? I am not sure some of these blogs are actually claiming that Insurers are ‘discounting’ premium to pay commissions to Strata Managers and Insurance Brokers (yes, it’s the same commission), as your suggest.

Insurers tend to price risks as accurately as possible, given the Australia insurance market is one of the most competitive insurance markets in the world (small market, and 100+ plus licences insurers). My experience is that Strata Insurance premiums are extremely good value, given the average premium sit around $3k for a 10 lot scheme with a $200 excess, or $300 plus $20 excess per owner! That’s for cover for important risks such as the building, public liability, and of course Office Bearers insurance to cover volunteers like you and I whom could be sued because of the decisions we make as Executive Committee members.

I assume readers understand the legal structure of an Owners Corporation, that it is an ‘unlimited liability’ legal entity, and as owner and member of this legal entity, we have a shared liability to make good any financial shortfalls. As Insurance is finite, there is an inherent exposure all owners face (a mismatch between exposure and cover). Yet we debate issues of premium cost rather than understanding the comparisons between policy covers (they are not the same), quality of financial security, claims payment track record to name a few.

So why do insurers pay commissions to Insurance Brokers and other Agents such as Strata Managers? Because it is an extremely efficient form of distribution cost, leading to lower premiums. Rather than employing teams of sales and distribution staff, Insurers know that brokers and Agents can form a much more intimate relationship with the ultimate customer, and importantly advocate an accurate view on the risk profile of the scheme, leading to the most competitive terms (policy cover, security, claims payment turnaround, etc, and yes, price). Why are Strata Managers a good distribution point for Insurers, because they know the building, its history, quality, better than anyone. Generally, even Insurance brokers need to go to Strata Managers to get details on risk profiles, claims histories, etc adding another step in the process. Strata Managers and Insurance Brokers also do a number of administrative tasks on behalf of an Insurer, and are critical at times of difficult and complex events to advocate and coordinate claims related activities. They also need to be subject to ongoing training and professional development. The Insurer expects a lot in return for the commission payment.

Now there are a couple more facts I would like to share here, all of which are good for consumers. Strata Managers can only distribute insurance product on behalf of a Australian Financial Services (AFS) Licensee. In the Strata industry, a AFS Licensee includes an Insurer, a Broker, or an Underwriting Agency. The activities that a Strata Manager is appointed to conduct under their management agreement in my view requires them to be trained and appointed by a AFS Licensee as either an Authorised Representative (to give general advice) or as a distributor (no advice). The benefit of having you Strata Manager appointed as an Authorised Representative (General Advice) of a AFS Licensee, is that licensee must supervise and audit their insurance related activities, AND provide Professional Indemnity cover for their activities. That is a massive consumer benefit, given that a Strata Manager is supported by a well-capitalised AFS Licensee, under the supervision of ASIC, and for Insurers, both ASIC and APRA. If for some reason, things go pear shape, you have support under this AFS regime (all governed under the Corporations Act).

There is another comment made related to the State Government, that they have done their homework on the proposed ban of commissions to Strata Managers. All I can say here is that the OFT is doing a massive job, and this issue is one of many major reforms they are considering. And I commend them for taking on a much needed review. But I can also say that there was no Financial Services representatives at the round tables, and this issue needs facts, it needs debate, and it needs consideration from a broader range of stakeholders. Remember, this proposed ban is for Strata Managers only, it is not prohibiting commissions being paid within the Strata Industry. If the OFT want to remove commissions and introduce fee for service, they must do so across the whole sector, not just impose a restraint of trade on Strata Managers.

Anyway, the current proposal means commission will still exist, but transferred to others. Brokers are likely to be the main beneficiary, so premiums are unlikely to reduce. Strata Managers will need to charge fees, but they will be well in excess of commission payments. A 15-20% commission on a $3k premium is only $450-$600 reward. A charge out on a time based fee service for the training and administrative work, plus the risk Strata Managers take on, could be many multiples of this (you need to ask a Strata Manager). I share the fear that many small to medium sized schemes, where affordability for owners and tenants alike is fragile, they will struggle with the increased costs, cut back services, Strata Mangers will then need to manage the downstream consequences. If Strata Managers are permitted to retain commissions, economics would suggest that there would be more chance of retaining competitive management fees, simply from a leverage of scale.

I hope some of these point help in your considerations and debate. In the meantime, make sure your Strata Manager has been appointed as an Authorised Representative (to give General Advice) as a condition of your current insurance arrangements. Many AFS Licensee will not appoint them to this level, because of the risks they need to assume. That’s not good for Owners, nor the Strata Community.

Nelson (Piquet)