CHU urges action on strata insurance

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Replacement costs for buildings have spiked over the last year, but sums insured have lagged, leaving an insurance hole for the unprepared to fall into

THERE IS a classic scene in disaster movies when an alarm button is quietly flashing red, but no one has noticed. The strata market finds itself in a similar situation due to a sudden spike in underinsurance. Before the pandemic, annual percentage changes in building sum insured (BSI) amounts at leading strata underwriting agency CHU had remained roughly in line with changes in the consumer price index and actual building costs. Currently, however, BSI increases at CHU track just

CHU is Australia’s first and leading strata underwriting agency, with a commitment to leading the way in the industry. CHU is part of the Steadfast Group, a top 200 ASX-listed company with $7bn in total billings. CHU’s policies are underwritten by QBE Insurance (Australia) Ltd and protect over 100,000 residential strata properties across Australia, with over half a trillion dollars in value insured. CHU won the ANZIFF Underwriting Agency of the Year Award in 2017, 2018, 2021 and 2022; the Insurance Business Underwriting Agency of the Year 2022 and Gold Awards for 2016–2018 and 2022 ; and was the ANZIIF Excellence in Workplace Diversity and Inclusion winner in 2019.

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Sums insured falling behind building costs

Mar 18

“If your building has not been valued in the past 12 months, there’s a likelihood it’s underinsured”

Kimberley Jonsson, CHU

under 4% annually, while the latest CPI figure was 7.3%, causing the nation to fret about the highest inflation since 1990. That’s already a glaring gap, but changes in actual building costs have risen much more than headline inflation.

Increasing at 17% annually, actual building costs now seem to bear no relation to BSI levels when plotted on a graph: BSI snakes along the ground, while the line representing house construction inputs has a trajectory like an out-of-control rocket. CHU chief executive Kimberley Jonsson is one person trying to draw attention to the situation. In a recent flyer highlighting the problem, the 45-year-old company “implored” owners’ corporations to not fall behind. “CHU have seen this growing concern in the past 12 months, with 42% of customers maintaining their current sum insured and only approximately one third adopting the suggested indexation on their sum insured,” she says. “If your building has not been valued in the past 12 months, there’s a likelihood it’s underinsured.”

Rising inflation, supply chain issues, catastrophic weather events, scarcity of materials and labour shortages have all come together to produce the sustained rise in replacement construction costs. At the same time, the cost of living crisis is pressuring many building owners and owners’ corporations to try to keep a cap on expenses by leaving sums insured unchanged. This double bind shows no signs of abating soon. “The likelihood that owners will find themselves underinsured is rising and will continue to rise as we continue to see inflationary pressures and material shortages, labour shortages tipping the balance of supply and demand for repair and maintenance products and services,” says Jonsson. While inflation is affecting all areas of the economy, its impacts are particularly pronounced in the construction sector, making replacement costs higher than expected for many items, with steel, timber and insulation among the worst affected.

Underwriting over 100,000 residential strata properties across Australia, CHU is in a unique position to understand the potential for disaster and is ready to help insureds and brokers ride out the storm. The speed at which the problem has arisen may mean that many are still unaware they have an underinsurance problem. CHU has a checklist of things to do to avoid getting caught short, a kind of healthy tips for strata insureds that should probably be on fridge doors in apartment buildings across the country:

“Our StrataTech platform has been a game changer, giving intermediaries the choice to have full control of their strata insurance portfolio with CHU online 24/7”

Kimberley Jonsson, CHU

Jonsson emphasises that brokers are a key part of the solution, despite the fact that the market is tough out there. Some insurers are reducing their risk appetite or even exiting the market altogether. “Getting multiple quotes, let alone one quote, can be difficult in a hard market where the risk appetites have changed,” she says. “We work closely with our established relationships to place new or maintain existing cover. “We have a consistent and sustainable approach to underwriting, looking at ways to work with brokers to provide solutions rather than decline to quote or renew. This

approach to underwriting is important to providing cover throughout different market cycles, and brokers appreciate our consistent support.” CHU also has local support teams in each state and key advantages in technology that make it easier for brokers to engage. “Our StrataTech platform has been a game changer, giving intermediaries the choice to have full control of their strata insurance portfolio with CHU online 24/7,” says Jonsson. “The platform provides multiple ways for brokers to access information, easily view items such as the current status of a policy, and obtain claims information and updates. Interconnectivity with our intermediaries and their systems is enabling a high degree of straight-through processing, quicker response times and a higher level of service.”

photo of buildings, replacement cost for buildings

The causes

The remedies

10%

15%

20%

June 18

Sept 18

Dec 18

Mar 19

June 19

Sept 19

Dec 19

Mar 20

June 20

Sept 20

Dec 20

Mar 21

June 21

Sept 21

Dec 21

Mar 22

June 22

CPI

House construction inputs

CHU BSI change

Source: ABS, CHU

Price of building materials rising fast

All groups

10%

15%

20%

Index

Quarterly change (%)

Yearly change (%)

Source: ABS Producer price index, September 2022

Producer price index for building materials* – Sept 2022

*Weighted average of 6 capital cities

25%

30%

120

150

180

Timber, board and joinery

Ceramic products

Concrete, cement and sand

Cement products

Steel products

Other metal products

Plumbing products

Electrical equipment

Installed gas and electrical appliances

Other materials

Demand for these goods also remains high as investors take on new projects to address housing shortages in many cities. Supply chain bottlenecks and labour shortages play a major part. The COVID-19 pandemic saw many countries instigate factory closures and port restrictions, which led to shipping congestion and container shortages. This was further hampered by extended worker absences due to isolation rules. “The result is an international shortage of materials like timber, steel, cement, metals and plastics, as well as extended delivery timescales,” says Jonsson.

Obtain a new valuation every two years to assess and value your building’s full replacement and reinstatement cost. In between valuations, review the building sum insured amount annually or consider taking up the insurer’s suggested indexation, because events and factors like material costs could impact your building and repair costs. Ensure the building maintenance is upkept – in many cases, prevention is better than cure, and if the building is adequately maintained it may help to mitigate major damage. Factor in all necessary legislative requirements, including the removal of debris; as well as professional fees and taxes and the escalation of costs during the rebuild. Be aware of any undisclosed renovations and improvements by owners. Ensure owners are aware that the owners’ corporation must know about any works within their units to ensure these form part of the overall building sum insured.

CHU created the first residential strata insurance plan in Australia in 1978 and has been a consistent leader in the strata and community title insurance sector ever since. It’s busy future-proofing the business beyond the current underinsurance problem. CHU is firmly focused on contributing to a sustainable and positive future for the whole industry by ensuring that all business decisions and activities pass through three filters: diversity and inclusion; environment and sustainability; and AI and technology – all the while maintaining a strong customer focus. “We strive to remain relevant through innovation and by continually challenging the way we do business,” says Jonsson. Technology holds great promise for the insurance industry as processes and systems catch up with recent innovations. CHU plans to leverage AI and its digital toolset to provide customers with greater functionality and service delivery options. Jonsson adds that CHU will also look for opportunities to extend its business with the addition of CHU Services, including CHU Assess and CHU Consult. “There are some exciting initiatives being launched early in 2023, so watch this space,” she says. It’s the happy ending that every disaster movie deserves, and Jonsson is confident the sector can take heed and pull through. “We want to ensure we provide the knowledge, assistance and advice that will support the industry as a whole, and continue to be the trusted partner for brokers, strata managers and the strata community,” says Jonsson.

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