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Standing Committee on Social Policy and Legal Affairs - 30/01/2012 - Residential strata title insurance

ARCHER, Mr Colin, Queensland Director, Strata Community Australia

LEVER, Mr Mark, Chief Executive, Strata Community Australia

McLUCAS, Senator Jan, Senator for Queensland, Commonwealth Parliament

Committee met at 09:03

CHAIR ( Mr Perrett ): I now declare open this public hearing of the House of Representatives Standing Committee on Social Policy and Legal Affairs into the affordability of residential strata title insurance. I will hand over to Senator Jan McLucas.

Senator McLucas : I am a senator based in Cairns in North Queensland. I know Warren Entsch and I—without even talking to you, Warren, I think I am speaking on behalf of both of us, and you will probably want to say something afterwards—want to take this opportunity to thank the Standing Committee on Social Policy and Legal Affairs for taking on this extra reference that we have provided to the committee, which is looking at insurance generally. I also want to thank Mark Lever from Strata Community Australia for, I think, starting this process with the series of the forums that he held in North Queensland to talk about the situation that we face in terms of strata title but, of course, more broadly in terms of bed and breakfasts and rural communities as well. What has happened to our insurance in North Queensland over the last 18 months or so needs to be investigated. The onion rings need to be pulled apart. We need to understand why this is happening and, most importantly, what the solutions might be. Graham, thank you very much for bringing your committee here. Thank you for the opportunity to welcome you. In doing so, I also acknowledge the traditional owners on whose country we are meeting today and pay respects to their elders both past and present.

CHAIR: Thank you very much. I think this is the first time in the history of the House of Representatives that we have commenced proceedings with a welcome from a senator. It is a very dangerous precedent, because there is normally a bit of tension between the House of Representatives and the Senate, but thank you very much for welcoming us here, Senator McLucas. Like Senator McLucas, I welcome everybody to this hearing in Port Douglas. Please note that despite the relaxed North Queensland atmosphere this meeting is a formal proceeding of parliament. Everything said should be factual and honest and it can be considered a serious matter to attempt to mislead the committee. The hearing is open to the public and a transcript of what is said will be placed on the committee's website. It is also being streamed live on the internet.

This inquiry is specifically focused on the affordability of residential strata title insurance, and the hearing today will be limited to that issue. The committee is aware that there have been increases in other insurance premiums—for example, B&Bs, farm stay accommodation and others. If you have a concern that is not related to strata title insurance, please put these concerns in writing and the committee will accept your correspondence. The committee will be considering how to investigate these broader concerns around insurance premiums.

We have received a large number of submissions regarding residential strata title insurance. Shayne, George and I have been in parliament less than four years, but this is certainly the biggest number I have ever seen—over 400 in total. Most of these are now available on the website and others will be made available over the coming fortnight.

The affordability of residential strata title insurance is affecting many people and imposing great financial stress. That said, this is not an easy issue to address. The committee is looking for solutions and obviously welcomes everybody's ideas—locals and representatives of the insurance industry and legal industry. We recognise the need for a prompt response and accordingly are looking to present a report to parliament which makes recommendations to the government. Even though we are made up of Labor and LNP members, we will make a recommendation to the government. The report will not contain all the answers, but it will set out to the government a clear and strong plan of action.

At the end of today's program we have some time set aside for anyone to address the committee and speak about their concerns and their experiences. If you wish to speak at that time, which will be at around 11.30, you need to make yourself known to one of the staff. I now welcome Mark Lever and Colin Archer from Strata Community Australia. Gentlemen, do you wish to make a short introductory statement before we proceed to questions?

Mr Lever : First of all, Chair, thank you for your welcome. I would particularly like to thank the committee for taking on this reference. It is a milestone for our industry in a number of ways and is historic in the sense that, as far as we know, it is the first time the parliament has actually taken on an issue or at the national level dealt with an issue specific to our sector. It is a relatively new part of the economic and social fabric of this country and we have tended to find in the past that policies affecting our sector have been developed by reference to some other part of the economy. For example, the tax system variously treats bodies corporate as mutuals or not-for-profits or corporates depending on the context. It does not actually deal with them on their own terms. Many other areas of policy are like that. Disaster relief is relevant. There was no provision in any disaster relief arrangements in the most recent agreement between the Commonwealth and the states to deal with the specific needs of bodies corporate. So the fact that the parliament is now recognising this is a discreet sector of the economy with its own interests and its own dynamics is terribly important.

In terms of the issue at hand, you have our submission and we are happy to elaborate on any element of it that you wish to explore. The one thing I want to emphasise is that, yes, we have seen some dramatic changes in prices. We all know that price stability is a fundamental goal of economic policy and, when you lose price stability in any important commodity, that has consequences. In this case there will be evidence before you in the submissions and people talking today about how those consequences are severe. Perhaps the most important of those in many ways is the intangible called confidence—that is, the impact that this uncertainty through price increases and the threat of further increases is having on people's own approaches to the way they manage their lives. People have invested in this sector as their homes or as an important part of their assets based on a certain cost structure. They are now told: 'Sorry, that was wrong; there is a different cost structure. We actually do not know what it is.' That has consequences for investment and all sorts of things. I just wanted to start on that point.

I should also add that Strata Community Australia is a relatively new organisation but it does have a fair depth of experience and history through the constituent bodies that formed it last year. Mr Archer is one of my directors. He was also the founding president of our predecessor organisation, the National Community Titles Institute, back in 1996. He runs one of the larger body corporate companies in Queensland, particularly North Queensland, and indeed in Australia. So there is a wealth of experience and knowledge of the sector beside me and I encourage you to take advantage of that. Thank you very much.

CHAIR: Thank you, Mr Lever. Just to clarify: do you have national coverage?

Mr Lever : Absolutely.

CHAIR: But Mr Archer particularly has a Queensland focus?

Mr Archer : I have been practising in the body corporate industry since 1981 and in North Queensland for some 15 years of that. We have experience with bodies corporate from Weipa through to Mackay. We are certainly aware of the problem and it has been with us now for 15 months. We are certainly delighted that Senator McLucas and Warren Entsch have got together to promote this standing committee and try to address our problem because, if we go on much longer, there is a level of pain that the bodies corporate simply will not be able to sustain. We are already having situations where older people are having to consider selling their houses and moving out because they simply cannot pay their body corporate levies. Obviously we have got an enormous economic loss. We have got levies on many units going from $4,000 to $8,000 a lot as a consequence of insurance and it is simply unsustainable. So I am here to help as much as I can.

CHAIR: With that in mind, the submission mentioned the collapse in competitive tension in the tropical insurance market. You said already people are considering selling these units because they cannot meet the ongoing costs, particularly insurance costs. Could you tease that out a bit more for us.

Mr Archer : We had a lady in Townsville who was a pensioner who said she simply could not afford the $5,000 a year strata levies which came about because of an increase in insurance from $500 to $2,500.

CHAIR: So from $500 up to $2,500?

Mr Archer : Yes.

CHAIR: So a $2,000 per year increase?

Mr Archer : Yes. In our submission I have given the actual costs of my own bodies corporate that I manage.

CHAIR: I appreciate that—particularly the jump.

Mr Archer : Bear in mind that this jump first came about during October 2010 when Zurich notified their clients that they had experienced difficulties with their capital ratios and that they were to increase their insurance 3.5 times. Most of my clients managed to find alternatives to Zurich, but there are not many alternatives. The main alternative in larger bodies corporate is Strata Unit Underwriters, which Brad Robson, sitting behind me, is here to represent. Otherwise they stay with Zurich. But in general terms they all went up at least two or 2½ times. We suspect that there is worse news coming if we do not come up with something in this committee.

CHAIR: Just to be clear, that was pre Yasi. It was post Larry—

Mr Archer : It was November 2010, three months before Yasi and as a consequence, they tell me, of Larry. It had nothing to do with Yasi.

CHAIR: Were any of your buildings significantly affected by Larry?

Mr Archer : There was no major damage.

Mr ENTSCH: Just on that, first of all, are you aware of the difficulties of those who are seeking alternative insurers that a number of those that used to provide coverage have withdrawn from the market? Are you aware of that?

Mr Archer : Yes, we are aware that there really is only Zurich and SUU in the market for large buildings. In the lower end we have an AMP alternative. There are very few alternatives in strata title. Some insurers will write them under a commercial policy.

Mr ENTSCH: Are you also aware that even those that are covering are not taking on new business? Are you aware of any of the insurance companies refusing to take any new business and only covering those existing customers but of course for the increased rate? Are you aware of that?

Mr Archer : Yes. Zurich will not take any new business, but SUU and AMP will. AMP is generally a $10 million limit.

Mr ENTSCH: The Chair asked about evidence of impacts on affordability and people being able to stay in their units. Just to tease that out a little bit, I have got an example of two units in one complex. One was bought for $1.2 million and the other one for $560,000. They had to be sold because they could no longer afford to be there because of the increase in body corporate fees linked directly to the insurance. The body corporate had to put extra levies on to cover the additional unexpected cost. Those two units sold in the last couple of months. The $1.2 million unit sold for $530,000 and the $560,000 unit sold for $230,000 because the owners had no ability to raise the funds to pay the levy because they were on a fixed income. They had to sell those units. I am just wondering if you have any examples of that type of thing occurring?

CHAIR: Mr Entsch, I think you might be leading the witness a bit here.

Mr Archer : We do not act as a buyer or seller but obviously we hear these stories, but I have not got any that I could substantiate. That is what we have asked people to give us submissions for.

Mr ENTSCH: Okay; fair enough.

Mr NEUMANN: In the 400 submissions we have received there is considerable evidence given by people that the increase in insurance premiums predates what you are saying and some of the evidence indicates that it is as early as 2005-2006. Have you got any evidence about that, because some people gave us in the written submissions increases from those days?

Mr Archer : I did not go back that far, but we certainly did not notice. In North Queensland insurance has always been 30 to 40 per cent dearer than in South-East Queensland. Now, as a general rule, up here it is 40 to 45c in $100 whereas in South-East Queensland is seven to eight cents for the same product.

Mr NEUMANN: The Insurance Council of Australia give evidence in their submission that several insurers commenced a return to a more technical risk price in 2008-2009. Is that accurate, because that precedes the date that you are talking about as to the increases in prices? Do you think the increases in prices started in about 2008-2009, as the Insurance Council of Australia say?

Mr Archer : I really have not got the facts to substantiate that. We certainly noticed substantial rises in October 2010.

Mr NEUMANN: I want to go through a couple of things that they submit to us because I want to give you the opportunity to respond to what the Insurance Council say. They say that strata premiums have historically been discounted as to risk with some paying less than a third of their technical risk prices. I would be interested to know what the Insurance Council shareholders in their companies think about that. But I am interested to know what you would say about that. Were they being benign and charitable and ripping off their shareholders? Is that accurate as to what they say, from your experience?

Mr Archer : I cannot speak for them, but they say they are experts on risk management. You would wonder why they were pricing it at a third.

Mr NEUMANN: Okay, so you have not got any technical experience—

Mr Archer : I have got no technical experience.

Mr NEUMANN: I thought from your years of experience in the industry you might be able to comment about that.

Mr Lever : Our members are intermediaries, if you like. They do not necessarily have visibility of the technical pricing and they simply take the prices they can get. How they are derived is not something that we would necessarily claim to have expertise in.

Mr NEUMANN: Given your observation in the industry, the Insurance Council is saying that they would like state and federal governments, particularly the state ones, to take all types of taxation, stamp duty et cetera off this industry. Are you aware whether in the last two to three years there has been any increase in your industry of state government taxation, stamp duty and the like?

Mr Archer : No. The taxes have been GST of 10 per cent—which is the federal government—and the state government's 7½ per cent. They have not put the rate up. But 7½ per cent of $500 is a lot less than 7½ per cent of $2,000.

CHAIR: Are you saying there is a bit of a windfall profit for the state government and for the federal government?

Mr Archer : There is a massive windfall profit for the state and federal governments because no-one gets a GST credit on insurance even if your body corporate is registered. You then have to levy people the extra 10 per cent on their levies and because it is residential property it is input taxed so there are no credits.

Mr NEUMANN: The Insurance Council say—and I am giving you the opportunity to respond—that GST and stamp duty adds 20 per cent to the premium. What do you say about that? Are you in a position to comment on that?

Mr Archer : It is 17½ per cent in Queensland. It is different in New South Wales. It is a substantial amount; 17½ per cent on an extra $1,000 is an extra $175 per resident.

Mr Lever : I guess the issue here is that if the base premium goes up the taxes go up. One follows the other. But we are talking here about the base premium going up; that is the core issue.

Mr NEUMANN: You talk about the option that the Northern Territory has for what is called the Territory Insurance Office and you have given a couple of paragraphs about that and not very much information in your submission, to be fair. Are you in a position to tease out how you think that TIO, which I presume is a bit like the old SGIO in Queensland, would operate, for example? It would be a state government responsibility here in Queensland because the Northern Territory is not a state, and so that is a federal issue. How would a new SGIO operate and what are you proposing?

Mr Lever : We are not necessarily proposing that we replicate that model here in Queensland. The TIO is a Northern Territory government agency that is set up to facilitate access to insurance in the Territory. This is not a new issue in tropical Australia in the sense that it has always been difficult to insure. There has been a sort of multiplier effect in recent months, but going back at least as far as Cyclone Tracy, if not further, there has been a TIO. Again, we only look at the TIO effectively as a customer. With strata, as Mr Archer mentioned, the premium rates in Brisbane are around 7c to 10c in $100. I understand that in the Northern Territory they are 15c to 20c, and up here now we are looking at 45c, so two to three times the rates are being charged in North Queensland vis-a-vis those in Darwin. How that occurs is really something we can only speculate about; we do not have access to their financials or their underwriting.

The only observation I would make is that if you look at the insurance industry, submissions as you mentioned, one in particular, Zurich, highlights the cost of capital as well as the cost of claims as a big driver of the increase. The cost of capital has no doubt gone up post GFC and post the big reinsurance events in recent years. The Northern Territory, because it has a government guarantee, does not have to meet the capital adequacy standards and can effectively price the risk purely on the basis of the risk not the cost of the capital required to support that worst-case scenario, which is what the APRA standards are based on. Essentially, it operates on a very different cost basis because it does not have to service large amounts of capital.

CHAIR: Mr Lever, I think your submission actually suggests that the Commonwealth is backing the Northern Territory. I am not sure that the Treasurer necessarily agrees with that, but that is the gist of your submission?

Mr Lever : I think there is an implied guarantee in that the Northern Territory is not a state, it is a creature of the Commonwealth parliament. As such, the Northern Territory government is effectively guaranteed by the Commonwealth, so there is a continuum there. I just thought that was an interesting—

CHAIR: I will look for that line item in the budget.

Mr CHRISTENSEN: Going further on that issue of the TIO and particularly the chairman's point there, is the implication then, if you see it as an extension of the Commonwealth through the Northern Territory government, that the Commonwealth should be facilitating some expansion of the TIO to cover Northern Australia or are you suggesting something altogether different?

Mr Lever : We are suggesting there are a number of options that could be looked at. We also talk about the Australian Reinsurance Pool Corporation and the role they play or have played in stabilising insurance markets in the past. There are a number of examples going back through recent history of governments getting involved in insurance markets. The TIO is a longstanding one. You have had interventions in medical indemnity insurance. You have had everything that happened when HIH collapsed and there was a large-scale government intervention in the insurance market. What I am saying is that government intervention in the insurance market is not particularly novel; it happens all the time. We are simply making the point that it is not something that needs to be considered as a terribly radical concept.

Mr CHRISTENSEN: That is a good answer to the rabid free-market ideologues, I suppose. The other issue you have touched on is that with other compulsory insurance in Queensland there are cheaper alternatives offered by the state—for instance, third-party insurance with your rego. Would you like to expand on that?

Mr Lever : Each of them has to be looked at on their own merits and they have all arisen in the context of the history of those insurances as compulsory. What is interesting about this sector is it is probably the only compulsory insurance class that is not actively regulated by state or Commonwealth. That is basically because the market has worked pretty well up until now and there has been no need for governments to get involved. Now, clearly, that reaches a point because once you make a product compulsory, government, by definition, has intervened; it is not a pure market. So then it is a question of what follows from that. If government mandates that you buy something, is there an obligation on government to actually make sure it is available and affordable? It is a question of principle.

Mr CHRISTENSEN: On page 8 of your report you have raised a very good point about strata type developments playing a large and growing role in new residential communities in North Queensland. Certainly that has been my experience in Mackay and I am sure it is the case elsewhere. You go on to say that, anecdotally, the current insurance situation appears to be acting as a brake on new development in many of those areas. What do you think the broader implications are of these high insurance costs throughout North Queensland, particularly for residential development?

Mr Lever : One of the drivers of that type of development historically has been tourism. If you look at places like Darwin and the north of WA, it is increasingly driven by the demands of the 21st century workforce, which involves more mobility and shorter term contract type work where the traditional suburban home does not necessarily work for a lot of people who are away from home for a long time. I think that, in a practical sense, is what is driving it. The concern here is that this cost structure that has been imposed on the sector is distorting investment decisions and perhaps leading to suboptimal choices in where people live and work. That is the sort of knock-on confidence effect we are talking about.

CHAIR: I thought your submission said that in WA there was a whole swathe of strata title units about to come through?

Mr Lever : There is. The WA government, as you might recall, created something like a $700 million fund out of some of the windfall revenue from the mining boom which they want to pull back into a regional development program. The bulk of it is going into something called the Pilbara Cities program, which has been variously described as a 'mini Dubai', in Karratha and Port Hedland. I am not sure, from my inquiries over there, how they are going getting insurance for those buildings but I know the brokers and the industry trying to place those new buildings that are coming on stream are finding it very hard going. Arguably, in that environment, the cost structures, the rents they can achieve on those buildings and the prices are less of an imposition than they are when you are dealing with self-funded retirees. But they are adding significantly to the cost of those buildings.

Mr Archer : Certainly, in your electorate, Mr Christensen, you would know that in those mining towns most of the new developments are low-rise multiresidential developments whether they are group title or strata title. Most of the mining towns are relying on this type of development for accommodation, which is in very short supply. There are new strata developments even right through to Bowen.

Mr CHRISTENSEN: Going back to the issue of timing of the rises, you have indicated both in your report and in your submission that in 2010 there were some noticeable sharp increases—up to 300 per cent, I think you say in your submission—and that was prior to Yasi. The strata unit underwriters specifically and also the Insurance Council of Australia have both sent out information sheets. The first thing they put the increases down to was weather events. You have suggested that this is as a result of Cyclone Larry rather than Yasi. My issue with that is that Larry crossed the coast in early 2006, yet it somehow took four years for them to get that in order. Do you find that strange if that is the correlation they are drawing?

Mr Lever : I do not because I do have a background in insurance. I understand that these things take a little while to feed into the insurance pricing models, particularly the reinsurance ones, as the body of claims accumulate. So, yes, there are some lags there. But it also feeds into things like the actuaries' capital allocation models. They will look at the claims experience and what that implies about the worst possible scenario they have to cover for. That will increase the capital requirement and that will in turn increase the cost of servicing that capital, which all feeds into the premium. So there is a sort of a snowballing effect that comes out of that. It takes a while to crystallise. In a short answer: no, I am not surprised.

Mr CHRISTENSEN: Do you think in the light of Yasi and the floods, though, that we will be waiting another four years to see another huge increase?

Mr Lever : This is really a question for the insurers, not for me, but my guess is that the snowball will continue to roll for a while yet.

Mr CHRISTENSEN: You make a very good point here about the statutory obligations, particularly in Queensland. You say there is an ongoing debate about whether those statutory obligations to ensure full replacement value actually permit the use of excesses and retentions. I notice that probably nearly all of the insurance that is on offer now has these quite large excesses built in for cyclone coverage. You say there is some debate about whether this actually meets with the legislation and what is required here in Queensland. Do you think it meets what is required? Have you looked into this?

Mr Lever : Not in a full sense. The observation there is simply that you need to look back to the core purpose of the insurance requirement in the legislation, which is to ensure that owners are collectively responsible for protecting the risk in full. You can argue that a very small excess or a moderate excess means that everybody is still fully protected except at the very low end. It is a question of how far you want to push that envelope, because if you put a larger excess in, the people have still got to come up with the difference and then you go back to the purpose of why you are insuring. If you have got a cyclone excess of $1 million on a property and there is a cyclone, say 20 units, they have each got to find $50,000.

Mr CHRISTENSEN: What are some of the excesses for cyclone coverage that you see at the moment: $10,000, higher?

Mr Archer : Some up to $10,000, but mostly it would only be in five or 10 per cent of the cases that we are seeing excesses. It is not as widespread as you probably think.

Mr NEUMANN: The Insurance Council say there is a 10 per cent claims rate on residential property and a 30 per cent claims rate on strata title. They say that we should transfer the burden, and a way to reduce claims is to increase the excess rate that Mr Christensen was talking about up to $500, which is the average they want to go to, from the current average of $12.50. Have you got any comments in relation to that?

Mr Archer : Most of ours have a $100 or $200 policy excess. I do not know where the $12.50 comes from. That might be a more a housing thing.

Mr NEUMANN: That is $12.50 per unit. That is what they are saying.

Mr Archer : That would be right.

Mr NEUMANN: Do you agree with the Insurance Council that we should do that, which transfers the burden onto the strata title unit holders, or should the excess remain on average $500 per year, which is what they say?

Mr Lever : A couple of observations there. First of all, that is the way the markets evolved. It is not something that has been mandated by anybody, it is simply the negotiations that have occurred over a long period of time and that is kind of where it settled as a market dynamic. You can speculate on the reasons for the higher claim rate: common property, vandalism and all sorts of things. You are not dealing with the same issues. People will knock over pot plants and things like that. You could treat that as maintenance but it has still got to be paid for. Either way, whether it is paid for in the insurance or paid for through the maintenance fund, it still has to be paid for.

Secondly, if you go to large excesses there is a real issue for the body corporate of actually collecting those excesses from each individual in the building. If somebody does not play, that creates a whole lot of work and potential risk for everybody else. It is a zero-sum game in that sense. If you increase excesses, you are creating other costs. Arguably the main reason why strata managers will defer putting something through as an insurance claim rather than as a maintenance thing is that they may not have the authority to deal with something outside of the maintenance budget, and they put it in as an insurance claim. That is a generalisation. All I say is that is where the market settled and any intervention like that is obviously going to have consequences for the market.

Mr NEUMANN: Take the Insurance Council's view. Why should someone in a unit be treated any differently or any more favourably than someone who owns a home? That is their argument. What do you say to that?

Mr Lever : I am not sure they are.

Mr NEUMANN: They say in terms of the excess; that is their evidence.

Mr Lever : It is their product, so it is open for them to charge whatever they like, and they do. It is not something that we created. If they want to go out and charge people $500 per unit, let's see how they go. Let's try that. I would draw your attention—and I can find the reference for the committee—to a recent court case involving a home warranty claim where one of the large insurers no longer in the home warranty business tried to argue, and in fact went to the full bench of the Supreme Court, that the terms of the policy of the $500 excess actually meant $500 per unit. I think it is a 201-unit Meriton complex, so the builder's warranty claim was for $80-odd thousand. The total sum of the excess was $100,000, so they said it was beneath the excess. They spent a lot of money and ultimately lost that, but I caution about going down the excess route when you have got those sorts of things in the marketplace.

Mr ENTSCH: I have a couple of questions in relation to legislative requirements—for example, third-party properly insurance. At the moment, if you want to take out third-party property, you have to take the insurance as well; you cannot separate them and give the option for the owners to self-insure the units. Would that be something that would be worth considering?

Mr Archer : There is that option now in a standard format plan of stand-alone townhouses.

Mr ENTSCH: Insurers will not do it, but I am talking about strata title.

Mr Archer : If I have got a block in a building on the eighth floor, how do I personally insure my part of the structure? That is not practical, is it? You have got to have a policy over structure.

Mr ENTSCH: At the moment, the way the strata title works, the valuation is on the entire property. When you are insuring, you cannot just insure the property, as you say. My understanding is the valuation is on a clear site and rebuilding the entire complex. Is there an opportunity for some sort of change in the way in which that is calculated—separate the common property, the roads et cetera to the living areas?

Mr Archer : It is a state government regulation, and I think you are referring to some of these standard format plans where you have got to insure all the common properties—the roads et cetera. I have got one up at Cooktown that is probably a similar situation to Mr Entsch's people up at Mount Carbine where you are insuring stuff you do not want to insure because you are insuring common property that you can operate quite well without and you do not want to go to the expense of insuring it. In this case it is roadworks and blockworks and that sort of stuff. In that particular case, I think it was disused halls and pools but the law says you must insure, and we have looked to the Queensland government to try and relax that.

Mr Lever : Those are issues at the margin of strata insurance requirements. The fundamental problem remains that, if you did not have mandatory insurance, you could have a committee of four or five owners who could hold a general meeting and get a motion passed to say: we will self-insure. Those people who vote for it may well have the financial capacity to do that, but the problem is if the building burns down everybody loses, whether or not they agreed with that resolution or they had the financial capacity to deal with that. That is why insurance is compulsory to prevent individual owners being disadvantaged by majority rules requirements.

CHAIR: In your experience, as buildings come to the end of their life—it is not necessarily the case in Far North Queensland—what happens as the value of the building goes down, there is the dissolution of the body corporate or the eventual sale and whether the cost of insurance is such that it is unable to be found? Can you make any comments on that?

Mr Archer : We have experienced that at the Gold Coast but not so much here where a building is falling down and everyone just wants to let it fall down and be sold onto the developers. Practically, you cannot allow that because, if someone gets hurt, you have to maintain it and you have got to insure it as though it were a new building. There aren't really any options. It is mainly for workplace health and safety reasons rather than insurance reasons. But if it is habitable, you have to ensure it for its full replacement value because you cannot take a lesser value under the act.

Mr Lever : You have touched on a much bigger issue than the one before this inquiry, and that is what happens when building stock reaches the end of its life. That is a huge issue for our sector. We are doing some policy development work to try to grapple with those issues. The reality is that, under current law, everywhere in Australia you would need 100 per cent approval to wind up a scheme and redevelop it. That is almost impossible to get. There are arguments that under corporations law you need 90 per cent compulsory acquisition and things like that that should be brought into play, but it is going to be a growing problem over the next years. You have buildings in Sydney that were build in the 1960s and seventies, when strata was first invented, that are now being forced to go through compulsory fire upgrades that potentially cost $40,000 to $50,000 a unit. These are buildings full of pensioners. How do they deal with that? They cannot. It is a massive problem.

Mr ENTSCH: Do you believe strata insurance in Northern Australia is affordable at the moment from your industry's perspective?

Mr Archer : In certain instances it is affordable, but it is getting to the stage where in towns, particularly Airlie Beach and, to a lesser extent, up here, rents are less than body corporate fees. It means your building has no value if you can only get $12,000 a year rent and your body corporate fees are $10,000 and your rates are $2,000. You suddenly have a worthless building. So, yes, we are getting to that point.

Mr ENTSCH: So you believe there has been a market failure in relation to insurance in Australia's north.

Mr Lever : What is the definition of market failure? Clearly the market is not working. Whether that constitutes failure I will leave to the economists.

CHAIR: I wonder if you could give an indication of how many of the 276,000 legal entities—I am not sure how many units that is—are owner occupied and how many are investment properties.

Mr Lever : There has been some research on that. It roughly lands at pretty close to 50-50. It varies depending on the location and so on—it is obviously lower here than, perhaps, parts of Sydney.

CHAIR: Okay. Thank you very much for your evidence. I particularly commend you on your submission. It is very impressive.

Mr Lever : Thank you very much.

CHAIR: I know it is a chore to come to Port Douglas!