Five-fold increase in insurance costs ‘justified’

Is a strata insurance premium increased by five times the original amount over four years too high? The Australian Financial Complaints Authority (AFCA) doesn’t think so.  As friend of Flat Chat and leading property lawyer and consultant Anthony Cordato explains, it’s all about your history of claims.

Chubb Insurance was justified in increasing a strata insurance policy premium by 500% according to a recent financial complaints watchdog AFCA determination, due to poor claims history, poor policy performance and market conditions in the strata insurance market. 

The Australian Financial Complaints Authority (AFCA) made this Determination on 7 May 2024: 

Premium increases

The premium increases on the strata insurance policy over the past 4 years were:

• 2020   $9,641.50
• 2021   $13,369
• 2022   $33,855
• 2023   $60,508

The premium increase for 2023 was five times higher than the premium for 2022. According to the insurer, the factors behind the increases were: 

• the significant amount paid in claims settlement (claims history)
• the very high loss ratio which meant it was making a loss on the policy (policy performance)
• other factors outlined in the Product Disclosure Statement (PDS) (market conditions)

Claims history

The Owners Corporation made a claim via the lot owner of unit 6 in July 2020 (‘the 2020 claim’) for water damage to the bathroom of unit 6 and the ceiling of unit 3 directly below. It was a storm damage claim. The claim was accepted, and the insurer settled the claim for $339,339.

During the repairs there was another leak causing further storm damage to unit 3 (‘the 2022 claim’). The insurer agreed to cover the damage but said that a second claim had to be lodged for the 2022 claim and that an excess of $25,000 be paid.

The Owners Corporation, via the lot owner of unit 3, disputed that a second claim needed to be lodged and ultimately made a complaint to AFCA. In October 2023 AFCA determined the damage was to be assessed as part of the 2020 claim, and so no excess was payable. The amount claimed was $80,000.

Policy Performance

The insurer said that the strata policy was an underperforming account with the Owners Corporation having made a large claim in 2020, a further storm damage claim in 2022 and incurred a further loss (although ultimately not a new claim) while repairs were conducted pursuant to the 2020 claim.

The insurer said that the loss ratio over its eight-year tenure of the policy was 587%, well above the target 100%.

The reserve allocated to the open claim for the additional unit 3 damage at the time the renewal was offered in 2023 was $50,000. This was in fact an underestimate as the eventual cost to the insurer was more than $80,000.

AFCA noted that the amount paid in settlement of claims by the insurer is not in dispute and it is not in dispute that the loss ratio was well above the 100% target as set out in the insurer’s underwriting guidelines. Chubb’s guidelines showed the rating structure considered operating costs and expenses; agent commissions; reinsurance costs; and loss ratio requirements and adjustments based on actual loss ratio performance.

Chubb said it accepted the renewal in good faith to preserve its relationship with the owners’ corporation’s broker, despite the losses it had incurred on the policy.

Despite the loss ratio not being in dispute, the Owners Corporation complained that the insurer was not justified in including the loss from the 2020 claim in the premium calculation because it could have pursued the lot owner of unit 6 personally for the claim amount. It said the cause of the damage to unit 6 and unit 3 was the unit 6 lot owner’s failure to maintain their lot and the insurer’s decision not to pursue the lot owner caused an unjustified increase in the premium.

AFCA rejected this complaint. AFCA said that the insurer accepted the claim in good faith. AFCA did not consider that the insurer’s failure to recover the claim amount from the lot owner of unit 6, who was a beneficiary under the Owners Corporation policy, was a breach of any obligation the insurer has to the Owners Corporation or that it caused an unjustified increase in the premium. AFCA also rejected that the open claim for lot 3 at the time of renewal caused an error in premium calculation. 

Market conditions

AFCA noted that “Insurers work within a competitive market and are generally at liberty to set their policy premiums in accordance with how they assess a potential risk.”

The Owners Corporation’s broker’s renewal recommendation made the following observations of the strata insurance market for 2023 – 2024:

• the strata insurance market is experiencing considerable rate rises and cover availability is becoming increasingly restrictive
• major losses across the insurance industry, in particular strata insurance, have seen insurers forced to increase insurance premiums and tighten underwriting guidelines on properties that have experienced high loss ratios and frequent claims
• on average, strata Insurance policies are currently experiencing premium increases of 10-20% or more for properties with no outstanding claims or defects

AFCA said that the information from the broker supported the position that the costs of providing strata insurance had increased when the renewal quote was provided, which was a factor in the setting of premiums outlined in the PDS.

The Owners Corporation also provided a renewal recommendation for cover for the period May 2023 – May 2024 from the broker showing cover was refused by three insurers due to the claims history.

The outcome

AFCA found that “It would be unfair to require the insurer to reduce the premium” for these reasons:

• The insurer is entitled to price in the value of the claims costs it has incurred in setting the premium.
• While … the percentage increase [is high] compared to previous years, [there is no evidence to show] the premium has been increased without justification.
• The premium increase is based on ratings factors and weightings applied by the insurer. There is no persuasive evidence to show the premium was increased incorrectly.
• AFCA was not satisfied there has been a non-disclosure, misrepresentation or incorrect application of the premium by the insurer.
• AFCA is not satisfied there has been a breach of any legal obligation or duty on the part of the insurer, including its duty of utmost good faith.

Conclusion

Think carefully before making a claim on strata insurance because the insurer will factor the claims history in its rating factors and weightings on the policy performance, which are likely to lead to an increase the premium when the insurance is renewed.