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Standing Committee on Social Policy and Legal Affairs
Residential strata title insurance
House of Reps
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Standing Committee on Social Policy and Legal Affairs
CHAIR (Mr Perrett)
Christensen, George, MP
Stone, Dr Sharman, MP
Neumann, Shayne, MP
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Content WindowStanding Committee on Social Policy and Legal Affairs - 01/02/2012 - Residential strata title insurance
BECK, Mrs Kerryn
BOURKE, Mr David
CHEETHAM, Mr Ryan
EDEN, Mr John
FAULKNER, Mr Mark
KELLY, Ms Saro
LEIBIE, Ms Karen
MOFFAT, Mr William Rodney
O'ROURKE, Mr Anthony
SEYMOUR, Ms Susan Carole
Committee met at 12:59
Evidence was taken via videoconference —
CHAIR ( Mr Perrett ): I welcome everyone to this inquiry of the House of Representatives Standing Committee on Social Policy and Legal Affairs into the affordability of residential strata title insurance. I acknowledge the traditional owners of this land and thank them for their continuing stewardship.
Please note that these meetings are formal proceedings of parliament. Everything said should be factual and honest, and it can be considered a serious matter to attempt to mislead the committee. This hearing is also open to the public and there are some members of the public in the room. A transcript of what is said will be placed on the committee's website and the hearing is also being streamed live on the internet. I am not sure how many parliamentary committees have been done by video conference while being streamed live on the internet, but it is a new use of technology.
This inquiry is specifically focused on the affordability of residential strata title insurance and the hearing today will be limited to that issue. I know there are other insurance premiums that cause complications for people but I want to make sure that we focus on that. If you have other concerns about insurance please put them in writing and send them to the committee and we will look at how they can be advanced. We have received around 400 submissions and have heard from a number of witnesses up and down the coast.
We know that the affordability of strata title insurance is affecting many people and is imposing great financial stress. We have heard from many witnesses who have had heartbreaking tales. We are looking for solutions and welcome all your ideas. We will be looking to get a prompt response out. We will report to the parliament as quickly as possible and the government will respond to our recommendations.
Ms Kelly : I come from Airlie Beach as well. I am the chair of the body corporate for a group of eight units. I have owned my unit there for almost nine years. We have had no insurance claims over that period at all. As of just over 12 months ago, we were with Zurich Insurance and we were paying—this is for body corporate insurance—$3,500 per annum. We went to renew that policy and they came back to us with a renewal amount of $18,283.42, which was a 522 per cent increase. We then started, after having a bit of a moment, to look around at other insurers. There were two things upsetting at that point. One was that there were only a handful of insurers that were offering body corporate insurance. The second was that the best offer we could find ended up being through one of our local brokers, Oceanic Insurance—the policy was from AMP—and was for $7,877. That was still an increase of 225 per cent.
Mr CHRISTENSEN: Was that with any excess?
Ms Kelly : was the same excess as the original Zurich policy, which I think was $250 for a standard claim. As I said, we have not made any claims. We did not suffer any damage through the particularly nasty cyclonic season we had last year. This sort of increase has had an extreme effect on our local area, not only with the storm season affecting our general economic activity—there has been a huge downturn across the broader community in addition to that caused by the weather we have suffered up here in Queensland—but also with the value of the units having gone down incredibly. Originally I bought my unit for $185,000 about eight or nine years ago. I had it valued at the top of the market at around $300,000. Now it is worth less than what I originally paid for it. So it is actually going to cost me money to get out of having the unit. And I cannot put the rent up—I have had to give my tenant a rent reduction because there are so many vacant units in our area. I am lucky to actually have a tenant and I am grateful for that. But the financial hardship out of the situation has been extreme. It is beyond us that we have had that incredible rise despite having made no claims. That is my submission in a nutshell.
Ms Leibie : We are slightly different. We live here in Mackay in the city. There are only two townhouses as part of the body corporate. The only thing that we share in common is the driveway. So both owners have their own house insurance, and you have some public liability there, so the only thing that we have really got to have the strata insurance for is the driveway. Each of us paid $623 for the last 12 months. That has now gone up to nearly $1,100, almost double. As someone who has just retired, I am not sure where this is going and what our strata insurance is covering. For a driveway, $2,000 a year with no claims is astronomical.
CHAIR: You have got the executive insurance there as well? But there are only two of you obviously.\
Ms Leibie : Yes, that is all we are paying insurance for.
CHAIR: Have you contemplated breaking up the body corporate or is that not feasible because of the shared driveway?
Ms Leibie : There is a shared driveway, yes.
CHAIR: Thank you very much.
Mr Cheetham : I am from Proserpine. I own a unit in a complex where there are eight units. We are about 150 metres from the main street in Proserpine. It is nothing flash, but it is affordable. Our insurance has gone up in the last three years. December 2008 was $2,900. December 2009 was $3,500. We had a minor claim from damage after Cyclone Ului, which was a $500 job. December 2010 was $6,036. The quote from Zurich in December 2011 was $29,950, which is increase of 430 per cent.
CHAIR: The $2,900 is looking good.
Mr Cheetham : We have managed to get insurance which is similar to the Zurich policy with AMP through the regional insurance brokers. So for the last 12 months we have just paid $8,660, but that includes a cyclone excess. I have not got it with me, so I do not know what the excess on that is, but it is quite substantial. We are in Proserpine so we probably will not get a Tsunami and there is probably not much damage from cyclones or anything else. I am aware that up north and down south there was a lot of damage last summer, but the Whitsundays was not really affected that much by any of the cyclones in the last few years. So that is where my question lies.
CHAIR: In terms of these premium increases, how have they affected all of you in terms of stress, your ability to put food on the table and that sort of thing?
Ms Kelly : Kelly I have got a two-year-old and I am 20 weeks pregnant, so it has been really hard. We are back to one income and to have a surprise like that has thrown our finances out the window. It is actually going to cost me money now—and I am not talking about a small amount of money; it is probably going to cost at least $10,000 to $15,000—to sell that unit and get out of it. To have to fork that out now is really hard.
Mr Cheetham : In my case, I have to represent all the other owners of the unit complex to make that phone call to say, 'This is what our insurance is going to be. This is what your premiums are going to be for the next 12 months.' You expect that there is going to be an annual increase, but not to that extent.
Ms Kelly : It is very hard to budget for.
CHAIR: The rise from $2,900 to $29,000 is phenomenal in three years. Who could forecast that?
Ms Kelly : I am aware of some other body corporates that are at the stage where people have just not been able to pay and they have actually had to go down the line of forcing those owners to sell their properties to recoup costs for the body corporate.
CHAIR: That would still mean that that building or that room would be vacant and the costs of the body corporate owners would be increased as a proportion of the insurance as well.
Ms Kelly : That is right.
Dr STONE: Has the replacement value of your properties—the total properties—changed over that time? Have they been reassessed and given a significantly different value?
Ms Kelly : Yes.
Dr STONE: Has your property been reassessed?
Mr Cheetham : We had a slight increase from 2008 to 2009, but since then it has been the same valuation on the property.
Ms Kelly : Certainly when we reached the point where we were saying, okay, we have to go out and look for another insurer, go out to the market to find out if there was any other reasonable quotes, it was certainly the same unit value—the replacement costs of the units were the same. It is all based on the same figures.
Mr NEUMANN: Do any of you use insurance brokers at all, or get advice from insurance brokers?
Ms Kelly : Absolutely. I have spoken to two in Mackay, and one of the other ladies on the body corporate spoke to the broker in Proserpine. The body corporate itself actually spoke to the local person in Airlie Beach, from Oceanic, and that is who we ended up going with.
Mr NEUMANN: Did the insurance brokers visit the property and do a site inspection, or did any representatives of the insurance companies do that ?
Ms Kelly : No.
Mr Cheetham : I do not believe so.
Ms Kelly : Airlie Beach and probably Proserpine are such small towns that the local brokers would be aware of the properties. I do not know whether that has any bearing on it.
Mr NEUMANN: When you had discussions with the brokers about the increases in price, the natural question would have been why. What reasons, if any, were given for the exorbitant increases in the price of insurance premiums?
Ms Kelly : I was told by several of them that Zurich was quite a popular choice, and they decided to get out of the market so they hiked their prices unreasonably. It is interesting that the handful of other insurers in the market at the same time have similarly hiked their prices. I know one broker who said it was due to the unusual storm season we had had, and they were trying to recoup their costs. It was still extreme. All the brokers were saying that they were extreme increases. The other thing that is difficult to manage is that the brokers get a cut.
CHAIR: Did any of the brokers offer to vary the percentage they would receive as commission?
Ms Kelly : With the ones we went with in the end, Oceanic, they certainly had a flat amount, which was different from the other brokers we dealt with. Also, something else we found in the small print of our policy with Zurich was that our body corporate was actually getting a kickback from the insurer. I cannot remember what that the percentage was.
CHAIR: The body corporate manager was receiving a percentage of the premium?
Ms Kelly : Yes. When you consider the exorbitant increases, and they were not willing to come forward with any sort of movement in that either, it was disappointing from the body corporate perspective. Obviously that is not what we are dealing with today—it is just something to be aware of.
CHAIR: It is all part of the cost increase. I guess if you receive a set percentage of a premium, if you do some work as a broker and you get a percentage of $2,900, that is a bit different from $29,000. It is obviously nice work if you can get it.
Ms Kelly : Exactly. So there are a lot of vested interests in the pie there, which was very interesting as we went through the process to find that out.
CHAIR: So it had always been there in the contract you had between the body corporate and the body corporate manager; you just had not noticed it before.
Ms Kelly : No; no-one had. I actually only came onto the body corporate in the last two years, so that was something that I found when reading through the documentation. I just cannot remember what the exact percentage was. I can come back to you with that if you want me to do that.
CHAIR: Yes, please. That would be good.
Mr NEUMANN: Do any of you have any other form of real estate, like a house or anything like that?
Ms Kelly : Yes.
Mr NEUMANN: Can you tell us about your insurance experience in the last couple of years in relation to that house property.
Ms Kelly : All right. We actually moved back into the house that we live in in the last few years. We had had that property rented out, and the tenants had put holes in walls, destroyed the kitchen and all that sort of thing. That was with CommInsure. We found out when we went to make a claim that the basis of our policy was that they would only cover individual events. Because we could not say that the tenants themselves were the event, I had to go and track down the tenant and get some sort of letter from them to say that something particular happened in the house which caused holes in this wall. It was a ridiculous process and it meant that half of what was damaged in our house could not be claimed under the policy. That went on for 12 months, and it has been a nightmare. So that is with our existing policies.
Mr NEUMANN: What about the insurance premiums for that property?
Ms Kelly : The premiums have not increased astronomically at all. They have been quite reasonable increases, I think—around four or five per cent, maybe. I did change insurer, though—obviously, given my experience with CommInsure.
Mr CHRISTENSEN: Ms Kelly, you rent out the unit—is that correct?
Ms Kelly : I do, yes.
Mr CHRISTENSEN: I suppose the question I have is that a lot of these body corporate units, flats and town houses are seen by some people as low-cost alternatives for housing and also rental. This would obviously be driving up your price for rental, wouldn't it? If so, by how much—without divulging too much personal confidential information about your own rental?
Ms Kelly : Sorry?
Mr CHRISTENSEN: I am just wondering how much it is driving up the rent.
Ms Kelly : I am in a position where I cannot put the rent up. I have had to give my tenant an actual rent reduction in the last 12 months. A single mum rents my unit, and she is awesome, and I am very grateful for having a tenant who is fabulous and looks after the place as if it is her own. But she cannot afford for me to put the rent up as much as I would need to. All of the rents have come down?
Mr CHRISTENSEN: What would the increase need to be for you to break even?
Ms Kelly : It would have to be at least another—hang on a second—
Mr CHRISTENSEN: Anyway, we will come back to that.
Ms Kelly : Yes, come back to me on that one if you like. Is that all right?
Mr CHRISTENSEN: Yes, that is fine. Are you insuring through AMP now? Is that right?
Ms Kelly : Yes, that is right.
Mr CHRISTENSEN: We heard evidence before that CGU are the only ones offering new insurance in the Whitsundays. Are they acting on behalf of CGU? Is the insurance coming through CGU or Suncorp?
Ms Kelly : Not that I am aware of, no. I think CGU is a separate insurer.
Mr CHRISTENSEN: All right, so there must be—
Mr Cheetham : Not that I am aware of. When I got the call from my broker about Zurich and the price, I said, 'You need to find something else that is within our price range,' and they came back with AMP. So it was just a matter of timing and when it was due to be paid.
CHAIR: Would your eight units be worth less than $5 million, Ryan?
Mr Cheetham : Yes.
Ms Kelly : Same here.
CHAIR: We have heard evidence that Suncorp will not do new business for anything over $5 million.
Ms Kelly : Apparently we had a quote from CGU at the same time as AMP, and it was more.
Mr CHRISTENSEN: Karen, do you know how much that driveway cost to build in the first place?
Ms Leibie : No, I do not.
Mr CHRISTENSEN: At $2,200 a year it would have to be the most expensive—
Ms Leibie : It is about 10 years old.
Mr CHRISTENSEN: At $2,200 a year it would have to be the most expensive driveway in Mackay!
Ms Leibie : Yes.
Mr CHRISTENSEN: We have heard evidence from the insurers themselves that these increases are going to continue into the near future.
Ms Kelly : Really?
Mr CHRISTENSEN: Yes, sad to say. They are pointing to numerous different factors, one of which is their reinsurance costs. At what stage for you personally is this going to become unaffordable? Is it at that stage now or is it nearing that stage?
Ms Leibie : It is definitely nearing it.
Ms Kelly : It is unaffordable for me now. I am going backwards, which is really stressful. To answer your question about rent costs, it would be by about $50 to $60 a week that I would have to put the rent up.
Mr CHRISTENSEN: What is that increase in percentage terms?
CHAIR: Sorry, you are about to reveal something that you might not want to reveal. That is fine. Maybe you should tell Mr Christensen later.
Ms Kelly : It is 120 per cent.
Mr CHRISTENSEN: A 120 per cent increase on your rent?
Ms Kelly : Yes. That is roughly what I would need to put the rent up by.
CHAIR: Thank you very much for taking the time to appear before us.
Mr Faulkner : My name is Mark. I am the treasurer for the Masthead Outlook body corporate at Mackay Marina. The complex itself consists of 20 units over five stories and was built in 2001. Over the last four years, since 2007, we have seen a fairly radical increase in our insurance costs. In 2007-08 our insurance costs for the complex were around $10,000. That has now increased to over $102,000 for the last year. There were a couple of steps in between. Have you got a copy of our submission there?
Mr Faulkner : You can see the incremental increase over the last four financial years. The level of cover has not particularly changed. We have increased the overall building cover costs from just over $11 million to $13½ million; the rest of it has remained unchanged. We have had one small claim in that period for around $70,000, which has been sorted. Other than that we have not made any other claims. You can see a tenfold increase in the four-year period, but just in the 12-month period it has gone from $25,000 up to $102,000. That is more than a 400 per cent increase. Our research here has shown that, if you have a stand-alone, four-bedroom, split-level house, your average insurance costs for that sort of dwelling are around $2,000 to $2,500, depending on your provider. On our calculations, we are paying in excess of $5,000 per unit for having our insurance cover.
As you can imagine, Mackay is probably in a better position than Airlie Beach, where rents are at ridiculous levels. But all those costs are now being passed on and our levies have significantly increased. We were fortunate in that we had money in the kitty to be able to cover this insurance increase and our body corporate manager was able to organise for us to make two payments at six-monthly intervals. Late last year we actually managed to get a second provider, or rather a second provider who was willing to look at buildings of our value came into the market, and we managed to gain a small reduction whereby the premiums have now come down to around $95,000 per annum. It is still a significant 12-month increase. The consequence of that is that repairs and maintenance and other works that need to be done on the building, which is now 10 or so years old, and for which we had set aside money, have had to be delayed. The levies for all body corporate members have increased substantially.
The other point I would like to make to the committee is that the process we have followed has been to have our body corporate manager organise our insurance for us. He told us, when our insurance fell due in April last year, that there was only one provider in the market at that time and that that was Zurich. So we did not have the option of going to another provider in the marketplace. As I understand it, that is pretty much still the same, although we do have this other option—but the reduction in premium from that other option is not great. So you have to ask yourself: where is the market at the moment and how is it operating? I do not think there is a true insurance market operating at this point in time because, given the environment, the providers have pulled out and because they have no benchmark against which they have to compete. If you had some sort of government body prepared to set the market, set the base at which providers operate, then you might have some sort of a market against which you can operate.
The other issue we ran into was getting quotes. Just getting the first quote from our provider was one thing, but then the process of trying to get quotes from other brokers—we obviously go through a broker—is a bit of a nightmare. Our advice is that to get another provider to provide us with insurance, we have to agree to transfer our business to them before they are prepared to provide us with a quote. That seems like a totally preposterous arrangement to me. I hope that is incorrect, but that is the advice we have had.
CHAIR: So you have to commit to buying the car without a test drive?
Mr Faulkner : That is correct. It seems absolutely ludicrous. The other issue I would like to raise before you ask questions is the disparity between regions. We are fortunate enough to have a member on our body corporate who holds units across different areas of Queensland. She has provided me with information about insurance costs for different complexes. On the Gold Coast, a 23-storey tower of 190 units with two full-size pools, three spas, two saunas, two steam rooms, a tennis court, 24-hour security, a jogging track and six lifts has an annual insurance cost of $95,000. Another example is a 10-storey apartment building in Buddina on the Sunshine Coast which has a total insurance cost of $16,000. That is a 10-storey apartment block. It seems as if this region is being totally disadvantaged for one reason or another.
I know, Chair, that you have said this inquiry is dealing mainly with strata insurance, but stand-alone dwellings have seen significant increases as well. Personally speaking, I have another four-bedroom house and the insurance has gone up 100 per cent in the last 12 months. I have gone from $1,200 to $2,500. My business insurance, which has had no claims in the last 10 years that I have been operating, has gone up over 100 per cent. I think I will leave my evidence at that, unless David wishes to add something to it.
Mr Bourke : No, I will leave it at that. Thank you.
Mr Moffa t : I represent the Regatta Beach apartments out at the marina. I am the chairman and treasurer. I also represent the Unit Owners Association of Queensland in the Mackay chapter. We have got similar stories because our proximity to the last speaker, Mark. To give you an idea: in 2009 our insurance on the building was $18,727. This year our initial quote was $140,000, but I am pleased to say we were able to negotiate that down to $72,000, which is some pretty good negotiating. But at the same time we have still got a $15,000 cyclone excess and $2,500 excess for any claim. It is basically history repeating itself as far as we are concerned with all the other issues. I would like to focus today on a specific issue, but at the same time I know there are a lot of people in this boat.
There are many issues that these staggering body corporate insurance increases raise, but one of our major concerns is the quality-of-life impact for borderline self-funded retirees. When you consider older couples who have purchased a unit, worked hard all their lives and had a vision of retiring into a unit complex that accommodates an independent but shared expense/serviced environment, they are now seeing these expectations diminish because of an increase in insurance expenses. A 300 to 400 per cent increase in insurance was not only unimaginable but I suggest impossible to budget for and absorb. Also keep in mind that the insurance expenses do not stop at the premium paid. Consideration has to be given to excesses. In Regatta's case it is, $15,000 for cyclones and $2,500 on all claims. The massive increases in insurance have the ability to smash people's dreams. These hardworking seniors in our unit communities will end up having to accept that their dream is no longer achievable and in a lot of cases will have to sell for possibly less than what they paid, in today's market, with the compounding effect being a reduced standard of living and possibly looking for government support, which is hard to accept when they have contributed all their lives to Australian society as taxpayers and in most cases employers.
There are a couple of suggestions and possible solutions that I would like to make. The more insurance companies in the market, the greater the competition and, hopefully, the lower the rates. In my experience the major incentive for participation in any market is a high return on your investment. This is where the government/legislators can play a role by offering possible higher tax breaks for companies who are prepared to operate in these so-called higher risk regions. I can see that legislation will be very difficult. You cannot legislate in a free market to make people put in prices that they do not want to put in, so there have got to be incentives to get more players in the market, which is the biggest problem we can see. There was only the one operator at the time when we got our insurance back in September, Zurich. There seem to be other issues too. I was advised that not all local insurers have renegotiated their reinsurance. Many will do so in December. It is obvious that all insurers have increased rates because of higher reinsurance costs in anticipation of these higher costs. A lot of people have the opinion that this appears to be gouging, which is a term used in the insurance community. That is somewhat suspect, we believe. Another point is what if you have paid $100,000, which some of the buildings in the complex out at the marina have and you have not made claims? In our case after the last cyclone the damage was $23,000 and now we have just paid $72,000 so that is well and truly covered in one premium. There is a lot of questions, as far as we are concerned, for the insurance companies to answer, but it is very difficult because, from what I understand, there are only six underwriters in the whole world so that has to have an impact too on where the insurers go for their underwriting. I would like to thank you all today.
CHAIR: Thank you. I am wondering what the $23,000 claim was for. Was that over Cyclone Yasi?
Mr Moffat : Yes.
CHAIR: What was the damage? What was the claim for?
Mr Moffat : Some guttering, a roof panel and some water damage but that was basically it. Those buildings out there are built to a code and we have a massive breakwater in front of those buildings but this does not seem to have any impact on selective quoting from insurers. I might add that in all those costs, and I will be surprised if anyone else has got it in their policy, they have deleted storm surge. There is no insurance in those policies for storm surge.
Mr CHRISTENSEN: What of the cyclone excess that you quoted in your case? Was it mandatory to take that or did you negotiate that?
Mr Moffa t : Both, I would say. It is hard to know. I cannot really answer that emphatically but it did have an impact on the quoted sum. The higher you put that up I would imagine it did. But that was basically the bottom line, as far as the insurance policy was concerned. It was $15,000.
Mr CHRISTENSEN: What about you, Mark? Was there any cyclone excess that you had to take?
Mr Faulkner : In our instance at the time, which was early 2011, we actually posed that question to our manager and he said he had already been down that track and there was no real advantage to us in terms of the premium to actually increase our excess levels. So at the moment our excess has stayed at what it was before, which is $500.
CHAIR: I wonder if you could tell me a little bit about the Mackay rental market and unit sale market. We have heard evidence from Saro about her area. But what about Mackay? Is it buoyant or is there low turnover or what?
Mr Bourke : I am a property valuer and a fellow member of the Australian Property Institute. I deal with this day in and day out. The rental market is quite strong. In fact, it is increasing. One anecdotal piece of evidence suggests that a gentleman and his wife and kids are being charged $240 per week for an unpowered caravan site, and that is the tip of the iceberg. Market values are, again, very strong—not increasing, but certainly not falling back.
CHAIR: So vacancy rates are quite low?
Mr Bourke : They are very low—one or two per cent.
CHAIR: These insurance increases will be passed on to tenants for investors, but obviously the pensioners and the like are going to be struggling.
Mr Bourke : That would be correct.
Mr NEUMANN: Has there been any population change? We have had evidence that it has had a demographic impact on communities such as Townsville and Cairns. Has there been any diminution in population growth or decline?
Mr Bourke : No. The Mackay region has increased by probably two or three per cent in the last 12 months, according to ABS data. There appears to be an influx of people coming in and looking for work in the mines et cetera. They are driving up the rental market. There are numerous stories of bidding wars, almost, for people who rent properties.
Dr STONE: I have a question for anyone who might be able to answer. Have any of you approached the ACCC to complain about the fact that you could not get more quotes or about the price gouging—the different quote levels you got? Or have you approached the Financial Ombudsman Service, which is the insurance ombudsman that is meant to deal with cases in which someone is in conflict with their insurance agency, as in this case, perhaps disputing the price rise?
Mr Moffatt : In Regatta's case, no. We have complete faith in our broker, who has an investment in our building.
Mr Faulkner : I have actually spoken to our body-corporate manager about this very matter—whether we should be taking this to the ACCC and other relevant authorities. He agreed that it is probably a matter worth pursuing, but he did not think it would be worth pursuing on an individual body-corporate basis; it would probably be better to deal with it as a body-corporate association or organisation, because we are obviously not the only ones who are suffering this issue.
Dr STONE: So no-one has actually had any real exchange with either the Financial Ombudsman Service or the ACCC to get feedback from them?
Mr Faulkner : Correct.
CHAIR: Thank you very much. I now call on the next witnesses.
Ms Beck : My husband and I manage the Shores Holiday Apartments at Blacks Beach, which is a body corporate property. There are 36 units in the complex. We are right on the beach. They are either townhouse units or fully self-contained two-bedroom apartments, standard villas or townhouses. They are separate, not high-rise, no lifts. Our insurance in 2005-06 was approximately four and a half thousand dollars. In November last year it increased to $54,000 for the property. Unlike other speakers, my biggest concern today is that we run holiday apartments so we have to increase our rates for accommodation to pay the cost for our owners, who are all small-time investors. It has got to the point now that we have put our rates up in November and again yesterday, because our owners are not going to get a return on their investment with this huge increase they have had in insurance in the last year.
Last year alone it went from $23,000 to $54,000. Our body corporate managers are Archers Body Corporate in Airlie Beach and they put out the feelers for quotes. They went to six different insurance companies. Only one quoted. So we had no choice whom we got. What really concerns me is the responses from the five who would not quote. Three of them said they do not give insurance to body corporates north of Rockhampton any more. AMP said we are over the value of $5 million, so they would not consider us. The other one would not consider us because we did not belong to a major motel chain. So, we are left high and dry. We have no choice. Next year our insurance levy could go to $200,000 and because of the current legislation we would have no choice but to pay that.
Another thing that has not been touched on much today is that the Body Corporate and Community Management Act is quite specific that you must insure at full replacement value. At the last valuation our property was $9.9 million. That did not change from the previous year, but the insurance more than doubled. We cannot insure for less than full replacement value. We also own a small investment property in Mackay and the insurance on that is almost half the insurance we pay on our unit at the Shores. If you divided the valuation between the units at the Shores it is far less than the value of our investment property. It is getting to a point where tourism is going to suffer significantly if these increases continue. The gentleman before was talking about Mackay and the rental market. We have a lot of people stay with us that are relocating to Mackay looking for permanent rentals and I totally agree with him that it is very difficult to find something. That is a benefit for us, though, because it helps us with our occupancy, but down the track it is going to be really difficult for the tourism industry to survive. Our business at the moment is not in tourists, it is for people who are relocating—people stay with us until they find a home to buy or a place to rent. In comparison a motel with a similar value to ours would pay half or less the insurance premium we pay. We are not comparing apples with apples. The insurance companies just have the run around. They do as they choose and we do not have any right of recourse. It needs to be sorted, but the legislation needs to be sorted too.
CHAIR: Ms Beck, do you have an example of a 36-room hotel in your area that has some insurance?
Ms Beck : I do have an example of a property in Mackay that has a valuation of $3.3 million. As I said, ours is $9.9 million, so you need to consider the valuation factor. But in the last financial year they paid approximately $4,000 a year for their insurance. If you triple that, that is $12,000. We are paying $54,000.
CHAIR: What is the use of that building?
Ms Beck : It is a motel.
CHAIR: Okay, so public liability and all that sort of stuff would be there.
Ms Beck : Yes, exactly.
CHAIR: Thank you very much, Ms Beck. Mr Eden?
Mr Eden : My name is John Eden, from Portofino apartments at the Mackay Marina. I have a very similar story to that of a lot of the other speakers. The Portofino apartments were built in 2002 and they are now valued at about $18 million. They consist of 24 units in a six-level complex. In the 2009-10 financial year, premiums stood at $25,000. In the 2010-11 season, they went up to $36,000 due to a revaluation being done. In 2011-12, at the same valuation, the estimated quote from Zurich was $176,000.
CHAIR: Did you say from $36,000 to $176,000?
Mr Eden : That is correct. We then went to market and tried to go through a couple of different brokers. Eventually we got hold of Strata Unit Underwriters, and their quote came in at $113,000 with a $500 excess. We have since reduced that to $106,000 with a $2,500 excess. We also have a premium or excess of $19,000 on cyclones et cetera. The value of each unit is in the region of $710,000. Each unit holder would pay, at the moment, $4,625, working on $111,000, which is the figure I had before the update. Quotes for houses in the same vicinity and of the same value would be in the region of $3,300.
I posed the question: why the increases? I have a list of dot points that I would like to bring to the fore, because these questions will arise and they will probably be expounded by the underwriters or the insurers.
CHAIR: Please do.
Mr Eden : Thank you. Their argument is that the total value of strata buildings is higher than that of homes. My retort to this was: if this is the case, then why the difference in premiums, as the example above suggests? Secondly, their comment was that the insurance industry has traditionally underpriced strata compared to other lines for competitive reasons, and whilst premiums have increased significantly they are now on par. Again, I get back to the example, and obviously they are not.
On the point that strata buildings are often based next to the coast and this puts them at a higher risk, the same argument applies as to the premium example. Secondly, insurance companies are not looking at the premiums on a case-by-case scenario. Units of this age should be under a more stringent building code and fire code, and this would actually reduce risk. Thirdly, in this specific case, the units are protected by a seawall encompassing the Mackay Marina, and the marina is not in a flood prone area.
The other point they made to me was that insurers have paid significant claims in relation to cyclones and other events in Far North Queensland. My retort to this was that there is no evidence presented as to the claims ratio on strata as opposed to other lines. The other argument was that it was a concentrated risk. My response to this was that it was not a valid argument—these buildings should be stronger and the above arguments apply.
There appears to be an element of monopolism creeping into the industry. We were unable to get any quotes bar the two from Zurich and Strata Unit Underwriters. Obviously Zurich have priced themselves out of the market in any case—they do not want anything to do with it. The underwriters should be the most experienced risk managers around, and therefore a 300 per cent increase in one year looks very suspicious. The other issue is that there is a broad-brush approach to increases. They are not looking at specific cases.
Another issue is that unit owners tend to be either retired or of the older generation and are unable to absorb these massive increases. One of the solutions I would like to put forward is that in light of increasing climate variability, which will affect the whole country, we might have to think about trying to introduce a disaster levy such as the New Zealand model, where the whole country bears the cost. This would spread the risk across the whole of Australia and not concentrate the recoupment of losses in north Queensland.
CHAIR: I think with the New Zealand model it is all people who take out insurance share the risk, not the entire country. I think it is a levy on insurance policies. That is my understanding of the earthquake policies. Thank you for your submission.
Mr CHRISTENSEN: Are the premiums at a level now where people in the body corporates that you are in are finding it unaffordable, or what will it take to make it unaffordable?
Mr Eden : As I said, there are a lot of older people and retirees. I have not questioned them personally as to whether they feel it is still affordable or unaffordable, but I think we can assume that people who are retired would not be able to cope with those sorts of increases.
CHAIR: Has anyone had their broker come out and inspect their building so that they are particularly aware of the building's characteristics?
Mr Moffat : Our broker is familiar with our building. I am not trying to read too much into it, but our quote was a lot less than we were initially quoted. To his credit, I think that was due to his having a fair bit of specific detail. I am hesitant to use this as an example for everyone else, but this is an issue that has been identified already—there seems to be a blanket attitude or a blanket approach to buildings when obviously there is building codes, there is age of building, there is location—it makes you wonder whether all these places have been approached. Maybe that had something to do with the reduction in our case.
Mr Faulkner : We have not had a broker come out to our building. Our body corporate manager has organised the insurance for us. they are down on the Sunshine Coast. He is involved with managing several buildings in this area. Going back to Mr Christensen's question about impacts. As the treasurer I have just recently noticed an increase in arrears. I can only put that down to the overall increasing costs associated with holding the units. I am not sure how far that is going to go or how bad that is going to get, but certainly there has been an increase in the last 12 months over what we have seen previously.
I also point the committee to an article that appeared in the Financial Review today. I do not know whether or not the committee has seen it. The insurers are clearly making a case for a rate rise next year.
CHAIR: We have certainly had evidence already.
Mr CHRISTENSEN: Considering that you have some in arrears now, we heard earlier in the meeting from people in the Whitsundays of body corporates there with residents in arrears or who are simply unable to pay. They have defaulted and gone into payment arrangements. The body corporate is obviously not a bank or a financier, so to pay what is owed they have to borrow. If you have people in arrears now, and the situation is deteriorating, as you have just outlined—that is, premiums are going to be more expensive—what will happen in your instance if you have people defaulting or being unable to pay on time or for considerable lengths of time?
Mr Faulkner : It sounds like we will probably have to go down the same track as the other unit holders you are talking about. Our excess funds, in which we had provisions for additional expenses and such, have essentially been used up. Our levy base has obviously had to increase in response to the increase in premiums, but the increase we put in place for the current period does not factor in any increase for the next financial year. So we are obviously going to have to see another increase in levies, if the article in the Financial Review today is accurate.
Mr CHRISTENSEN: Do you know if this has this affected the resale value of some of those places out there at the marina?
Mr Faulkner : I would say, yes, based on the number of apartments that either have been sitting on the market for a while or for an extended period of time or have managed to be sold but with significant reductions in what I would assume to be a normal price, or the expected price return.
Mr CHRISTENSEN: What is a significant reduction: 20 per cent, 25 per cent?
Mr Faulkner : I am not a valuer, but for example we bought our apartment in 2005 for $550,000, and I know of an apartment that was recently sold in one of the other buildings just up the road for $528,000.
Mr O'Rourke : My name is Anthony O'Rourke. I have come down from Airlie Beach. I am the chairman of the body corporate for the Seaforth apartment building in Airlie Beach. It is a modest building with nine apartments on three levels. In 2009-10 our insurance was $4,500. That increased in the following year, 2010-11, to $14,500. Then, last year, 2011-12, it went up to $32,500. It was actually $35,000 but I managed to get our broker to waive his fee, so we made a saving there. But we are talking about increases of 225 per cent in the first year and then 121 per cent in the following year. We have only nine units. We have people now who are in arrears on that building. The problem is that we cannot let that build up over time, so we have a policy that owners be referred to the debt collector if they cannot pay. People are actually quite stressed. Of course, the future in Airlie is that rents are going to go up because the miners are starting to move into town, and of course that means that long-term owners will be able to recover these costs, but that is for people who are renting out to miners. I know that people in Airlie who are not miners and who have ordinary jobs are not going to be able to pay the increased rents, and people like pensioners who have retired cannot absorb these costs.
I would just like to add that I think that insurance was with CGU, and they were the only people prepared to quote on our building. Also, my family owns a commercial building in Airlie; it is a number of levels. Our insurance with CGU went from $17,000 to $40,000. This is not a strataed building; it is just a commercial building. That was an increase of 135 per cent. We have been with CGU for 11 years, with not one claim ever.
CHAIR: Was there a change in use of that commercial building? Did a gunpowder shop move in there or something?
Mr O'Rourke : No, the building has not changed at all. We have shops and restaurants on the ground floor and we have accommodation on the upper three levels. The use has not changed at all. There were no claims.
Dr STONE: Has the valuation of the building changed—the full replacement value?
Mr O'Rourke : No, the valuation for our building did not change. The valuation for the apartment building changed. It was revised from about $3 million to $3½ million, I think, in terms of the replacement costs for the building, but that was the only change. When I spoke to our broker down south, he basically said, 'Look, if you're in this part of the world, the insurers don't want to know you anymore; it's just the problem.' If they are also flagging future increases, where do we turn to from here? There is only so much we can absorb in terms of insurance increases.
CHAIR: Obviously the commercial building can pass the costs on to the tenants, but that is not the case if you are an owner-occupier.
Mr O'Rourke : In the short term we cannot, because we have fixed agreements with our tenants. We do not have an arrangement with them to pay a proportion of the outgoings. They have a fixed rent; we have a set formula that way. Down the track I will ultimately change that. Also, there has not been the flexibility in Airlie Beach to do that because Airlie is a tourist town. If you have read the press, the last 18 months in Airlie have been absolutely awful with the dollar and with the floods last year and the negative press. The tourism just died. It was absolutely terrible. If you walk down the main street of Airlie, half of it is empty. There were just empty shops everywhere. So, in terms of putting up rents, forget it. It is just not going to happen until the dollar recovers. You will not see Airlie recover in terms of the tourism. It may get benefits from the mining, but that is going to be it. It is not going to be tourism in the short term.
CHAIR: Okay. Thank you.
Ms Seymour : I am the branch manager for Body Corporate Services here in Mackay. We look after over 120 buildings in Mackay, Moranbah, Emerald, Airlie Beach, Yeppoon and Rockhampton. The increase in the insurance is coastal. You can get insurance for the inland and it has remained fairly stable. Airlie Beach has been hit significantly harder than any other region on the coast. I am not saying that Mackay has not—it certainly has—but Airlie Beach has been hammered. The arrears across the board have been significantly rising. I have one CTS in Mackay at present, with 60 lots, and the arrears on that building are over $120,000. I have about three or four units that are going to auction because people cannot pay their levies, so the levies are significantly rising for the owners that are paying and this is just across the board. So, if others do not pay, the payers have to pay more to keep the buildings going.
CHAIR: Thanks very much for that evidence.
Mr CHRISTENSEN: In those circumstances for those units which are now going to go to the market, who is going to want to buy them?
Ms Seymour : Again it has decreased. People do buy them at a fire sale. In body corporate law, the body corporate do recoup some moneys. They may not get all of it, but they do get some moneys.
Mr CHRISTENSEN: The only reason I ask that is that we have heard in the Whitsundays there are people defaulting and body corporates borrowing. That situation is obviously unsustainable, but forcing them to sell is a no-go area as well because the market has just absolutely bottomed out. No-one wants to buy these units in Airlie Beach or anywhere in the Whitsundays because the costs are just too exorbitant. They might as well rent for the amount that they have to pay in body corporate insurance and fees. In that respect, if an owner cannot pay the insurance premiums and they cannot sell, what is the outcome?
Ms Seymour : Airlie will become a ghost town with empty units.
CHAIR: That would be a horrible state of affairs. We are trying to address that with this inquiry, in order not to let such a thing happen.
Thank you to everyone who attended today. I know it is a strange way to give evidence, but thank you very much for taking the time to turn up and give us such wonderful evidence. We will accept late written submissions for the next two weeks if that is of use to you or if there are people who were not able to be here today but want to send in a submission.
We know this is affecting people significantly and imposing great financial stress. We have heard it from you and from other witnesses up and down the eastern coast of Australia. Obviously we will be looking to make a prompt report and send it on to the government to see how they respond.
Resolved (on motion by Dr Stone):
That this committee authorises the publication, including publication on the parliamentary database, of the transcript of evidence given before it at public hearing of this day.
Committee adjourned at 14:17