Are commissions such a sin?

I am glad to hear of your good experience, and I agree irrespective of whether remuneration is by way of commission or fee, the Strata Manager or the Insurance Broker must deliver value! And by value I mean in all areas of the offering, strong advocacy, broad cover, financially secure, claims paying record, strong relationship with insurer, and of course price as well. In my experience, very few Insurance brokers are asked to give a “full advice” offering by Owners, and they simply provide quotes, without comparisons, and insert an advice limitation clause to protect themselves. Make sure they are properly instructed, so professional advice is given, and Owners can rely on this advice.

Nelson.

Yes, strata manager commissions are a sin.  OCN sees the detrimental outcomes for owners corporations, and opposes this practice on the basis below.  But let me emphasise that it’s everyone’s interest to work together constructively to support managers and owners alike through the inevitable transition. 

1. It is not transparent.  We prefer a clear fee for service model.
2. It is a conflict of interest (clear disincentive to obtain lower premiums)
3. It denies owners the right to good advice *
4. It denies owners choice (steered towards two insurers paying highest commissions)
5. It restricts the market (a new insurer, ACE, was squeezed out, and other large and respected insurers cannot get a foothold in this tightly held market)
6. It restricts competition which is a market-based driver of better cover and lower premiums
7. It denies owners the claims management advantage that brokers, with their large buying power, can deliver
8. Commissions can unfairly inflate strata management client income, for no extra work  **
9. Commission-inflated premium is then taxed – grossed up by FSL, Stamp Duty and GST. 

*  Case Study 1

Owners corporation (OC) insurance is placed by strata manager (SM).  OC wins Home Owners Warranty claim, is ready to start $500,000+ defects rectification.  Asks SM if they need to advise insurer (few owners corporations would realise that this is a critical issue).  SM says they can’t give advice, refers OC to insurer.  Insurer says it doesn’t give advice, refers OC to broker.  Broker is not paid by OC to give advice.

OC is put at risk on two counts.  Firstly, insurance policy fine print states building cover (all building cover) is voided if works are carried out over a certain figure (and makes it almost impossible to get capital works cover).  Secondly, the executive committee members are personally liable if anything goes wrong and there is no insurance in place.

*   Case Study 2
Complex of 5 villas, insuring via SM, were offered only one insurance option for a decade.  They had only one claim for $220 in ten years.  The claims history was only reviewed when the OC contacted a broker, when they received proper advice to increase their excess which reduced the premium.  Until then they paid the SM 20% commission + $500 fee to the SM’s broker, but were denied choice, service, and advice.  This cost them dearly.

**  Case Study 3
Nth Queensland insurance premiums increase up to 8-fold following catastrophic weather events.  SM commissions increase accordingly, for no extra work.  Does anyone think that’s fair?

As Dorothy said in the Wizard of Oz “Toto, I have a feeling we’re not in Kansas anymore.”  We’re not.  We’re in a world of increasing sophistication and scrutiny that sheds light into previously dark corners.

Karen Stiles

Executive Officer, OCN Australia

A few posts (including mine) have mentioned that Strata Managers should all be appointed as Agents or Distributors for Strata Insurers and be subject to the training and professional scrutiny that follows.

Yes please…. and I’d extend that to the individuals working with Owners Corporations (O/C) and not just their Licensees, as in that way those individuals would be legally required to do what (most) Brokers do now, by declaring the amount of their commission ($) instead of burying it as a % in a Schedule to their Agency Agreement, and by providing a service to O/Cs as opposed to merely pointing them in the direction of the Insurer who asks the least questions, pays the highest commission, and hosts the best conferences (for CPD).

Those of you who have been around this forum for a while would be aware that I’ve been pushing this particular barrow for years, ever since our Plan decided to self-manage and I found that our long-time Insurer wouldn’t reduce our premium  to account for the fact that they no longer paid a 23% commission to a Strata Manager, and then that a detached lot within our Plan had never been covered by our Policies; so much for our previous / long-term Strata Managers’ knowledge.

I reiterate that I’m speaking to my dealings those previous / long-term Strata Managers, and that I’m not tarring all with the one brush.

One final point ….. previous posts have made observations about how well served O/C’s are by the current crop of Strata Insurers, and if those refer to the degree of competition, on the basis of my experiences I must disagree.

When consideration is given to the numbers of Strata Insurers who won’t deal directly with self-managed Plans, who only (or prefer to) deal with Plans in their home State/Territory and price others accordingly, and who are subsidiaries of other providers, then the numbers (in/serving NSW) reduce to four (4).

I’m not sure that O/Cs need the proliferation that’s recently occurred with comprehensive motor vehicle insurers, but if more competition in the Strata Insurance industry had the same impacts on service delivery and premiums, then I again say… yes please.

PS – I just edited this post to remove a phrase that may have identified our previous or a similarly setup Strata Management Organisation; that was not my intention – Whale 10am

@eo@ocn said:
Yes, strata manager commissions are a sin.  OCN sees the detrimental outcomes for owners corporations, and opposes this practice on the basis below.  But let me emphasise that it’s everyone’s interest to work together constructively to support managers and owners alike through the inevitable transition. 

Hi, I just wanted to address some of the consumer concerns raised here, just to make sure we are debating this right issue – it reads to me that commissions to Strata Managers (on its own)may not be the problem that needs to be addressed.

If this form of remuneration for a Strata Manager is a sin, why it perfectly OK for an Insurance Broker, who is also a fiduciary to the Owners Corporation (OC), to receive this same income as a commission payment? They are no less conflicted.

 

1. It is not transparent.  We prefer a clear fee for service model.

The financial services sector in Australia has a world class disclosure regime, and the PSBAA adds to this for the NSW Strata Sector. The standard SCA Management agency agreement in NSW has on the front page the option for any OC to prohibit their Strata Manager from the receipt of commissions. A simple tick of a box is all that is required. Why is regulatory intervention needed when future EC members question the decisions of past EC members to legally enter into a commission arrangement? Is the problem the difficulty in readily access this type of information, as this could be addressed in a number of ways.

A fee for service model works well for larger schemes, however for small schemes, it tends to add more cost because the fee on a time basis, together with an amount together with the extra administration, exceeds the commission level, and adds costs to these schemes. That is the commission model works best (financially) for smaller schemes. However, all schemes can elect to opt in, or to opt out, when their managing agents agreement is up for renewal.

1. It is a conflict of interest (clear disincentive to obtain lower premiums)

There is nothing improper with being in a conflict of interest, it’s how that conflict is managed (disclosed and dealt with) that is important. Insurance Brokers also get remunerated via commission, and are inherently in a position of conflict all the time. It is the professional action they take to discharge their fiduciary duties towards the OC (same goes for the Strata Manager). From my experience, a professional and profitable management contract with an OC over the long term, far outweights any incentive to inflate premiums. Brokers face the same incentive if rewarded by commissions.

1. It denies owners the right to good advice *

I am not sure how you conclude that insurance commissions deny owners good advice? I would suggest under-skilled or uninformed professionals (Strata Managers or Brokers) may contribute to owners experience with poor advice. Also, from my experience, unless an OC specifically asks their Insurance Broker to give ‘full personal advice’ on their OC’s needs, they will simply get quotes and insert an advice limitation clause. The OC must properly instruct all their professionals.

1. It denies owners choice (steered towards two insurers paying highest commissions)

It is a fact that some insurers will pay brokers a higher commission level (up to 23.5% plus other benefits) than the two
insurance agencies I think you refer to (cap at 20%). But if the 300+ Strata Managers in NSW cannot practice in insurance because of this ban, isn’t that going to deny owners choice?

1. It restricts the market (a new insurer, ACE, was squeezed out, and other large and respected insurers cannot get a foothold in this tightly held market)

I repeat my point above, because competition is made up by the number of insurers and the number of distribution points (brokers and agents). You would need to ask ACE why they ceased trading, but feedback from brokers suggested their pricing was very low (profit concerns on their product). I don’t believe it is fair to suggest there are barriers to competition caused by commissions payments alone.

1. It restricts competition which is a market-based driver of better cover and lower premiums

Again, competition is not restricted by commissions. Insurer profitability has been the single biggest reason for insurers to either pull out of this sector, or for them not to enter it. It has not been a very profitable class of insurance over the last few years, as seen by consumers through premium and excess increases.

1. It denies owners the claims management advantage that brokers, with their large buying power, can deliver

Any agent or broker who has a strong and trusted relationship with their insurers can have leverage outcomes with claims advocacy. If they also have scale in their trading relationship, this can also help.

1. Commissions can unfairly inflate strata management client income, for no extra work  **

I am sure there are example of that, but equally, smaller schemes can get great value from the commission model – there is a trade-off. My view that unless any professional (commission or fee) demonstrates value, any relationship with an OC is unlikely to be enduring.

1. Commission-inflated premium is then taxed – grossed up by FSL, Stamp Duty and GST. 

I agree, a pet hate of mine, insurers tend to be in the tax collection business! But, unless you ban commissions across the sector (rather than just strata managers) this very problem will continue to exist.

I hope this adds to the debate and understanding, because we all ultimately work for the OC (and their owners) and addressing consumer concerns is important. We need to demystify, educate, evolve and improve for the benefit of all. A simple ban on commission for Strata Managers won’t get us there as a sector.

 

Nelson.

 

azur said 
A very timely topic as it currently affects our strata scheme.

We have a rear fence that is required to be replaced due to damage sustained solely from the back neighbour’s tenants who constantly overshoot their parking spaces and allow rubbish to mount against the fence.  This is the second fence that has been damaged beyond repair in 16 years. 

At the AGM, the OC agreed that a new fence is required and the strata manager advised that we can claim it against our insurance so we would only be up for the cost of the excess – this was the only option given to us aside from covering 50% (the rear pty owner to pay the other 50%) of the total fence cost out of OC funds.  After a colleague explained that the Dividing Fences Act 1991 regulates neighbours’ responsibilities towards dividing fences and there is provision where the dividing fence needs rebuilding or repairing because of negligent or deliberate damage caused by an adjoining owner (or by a person entering the land with their permission) that owner is liable for the entire cost of restoring it to a reasonable standard.

When I asked the strata manager why the OC was not advised as per the above, she dismissed it as a rather long & convoluted process to get the rear pty owner to pay for the entire cost of replacing the fence even though we have records going back over 16 years and photos of the current fence where it is clear that the damage was caused from the rear pty’s side – she then said that she would charge the OC $600 in order to represent us & this would effectively negate any benefit.

What is obvious from the above is that the strata manager does not care about what is in the OC’s best interests – it is easier for her to claim the fence on our insurance & the OC then carries the risk of the effect on claims history and the possibility of increasing our premiums and excess in the future from which the strata manager will benefit because of the commission structure so an obvious conflict that I can see no way of effectively managing in terms of acting in the OC’s best interests.

There will always be unscrupulous strata managers out there (as in every industry, there are people of this nature just waiting in the wings) but it sounds to me like your particular manager is just exhibiting signs of laziness rather than any particular desire to pocket an additional sum of money, that may be earned by your Strata Plan’s insurance premium increasing by a rather nominal amount due to a claim being submitted and paid by your insurer.

You do realise that most insurance premiums are on the increase irrespective of whether claims have been lodged or not, I hope. If you are unaware of this fact, simply review your claims history in line with the documented premium increases for your Strata Plan’s policy for an idea. 

Anyway, this particular case reeks distinctly of laziness rather than anything more sinister lurking in the bushes. I suggest your OC reviews its options with respect to obtaining new management, perhaps a company slightly more proactive and willing to take an extra step for the OC. 

Looking at the broader picture related to this whole insurance debacle, I am not sure where the Strata Managers became the big bad wolf in all of this. The insurers have elected to use Strata Management companies to complete work that they would otherwise be paying their own staff to undertake. 

I wish you all copious amounts of luck in actually achieving a decrease in your Strata Plan’s insurance premium if Strata Management commissions are banned. It simply won’t happen. The money that is paid to strata managers will be directed elsewhere – unless of course the collective ‘you’ believe that the insurers will suddenly find a cheaper labour force to complete their work for them and thus pass on these enormous savings to their customers. I mean, it’s not like insurers desire to make money out of this business. Right? Hmm. 

I suggest these efforts be directed elsewhere, at the actual problem. I hazard a guess that the problem is a lack of education, of understanding, and entirely of the ignorance-of-many (despite the best of intentions) gaining momentum. 

I watch on with bated breath.