Preliminary Pages

Foreword

The impact of Cyclone Lua in Western Australia and severe flooding in parts of Victoria, New South Wales and Queensland, constantly reminds us that we live in a place that is prone to natural disasters. All Australians need to be able to access affordable and appropriate insurance to provide cover against the risk of being affected by these kinds of events. We need a healthy and competitive insurance industry that is responsive to the needs of its customers, and has the capacity to provide adequate cover at affordable prices for all Australians.

On 27 February 2012, the House of Representatives Standing Committee on Social Policy and Legal Affairs tabled its report In the wake of disasters: inquiry into the operation of the insurance industry during disaster events. The report made a range of recommendations aimed at ensuring that the insurance industry has the capacity to respond to people’s claims on their policies in a timely manner. 

During the aforementioned inquiry, the Committee also received evidence about spiralling insurance costs in both disaster affected areas, and across Australia more broadly. In particular, the Committee heard of extremely concerning increases in residential strata title insurance in north Queensland. In view of these concerns, the report also recommended the immediate establishment of a taskforce to address the rising costs and potential market failure in the insurance industry across Australia.

Many unit and apartment owners, particularly those in north Queensland, have been confronted with increases in their insurance premiums of over 500 percent in recent years. This has been a result of a complex range of contributing factors, none more so than a glaring lack of competition in the market for residential strata title insurance.

The Committee recognised the urgency of residential strata title insurance affordability and resolved to conduct an inquiry into the issue with a short reporting timeframe. The Committee received the terms of reference on 24 November 2011, conducted four very well attended public hearings and received 431 submissions and 17 supplementary submissions. The Committee now delivers this report outlining a clear and direct course of action to both alleviate immediate hardship and address longer term sustainability issues.

The recommendations contained in this report call on the Government to strengthen the regulatory frameworks for Body Corporates, examine the methodologies for the assessment and pricing of risk, increase transparency in all strata insurance cost components, and raise consumer awareness of their rights and responsibilities.

I reiterate that the Committee responded expeditiously to the urgent issue of residential strata title insurance affordability. The Committee trusts that the Australian Government will be similarly prompt in implementing appropriate and much-needed reforms in response to the recommendations contained in this report.

I thank the members of the Committee and the two supplementary members who joined the Committee for this inquiry. Committee members took on this inquiry, in addition to their usual workload, in recognition of the urgency of the issue and the need to initiate Government action.

Finally, I thank the hundreds of people who made submissions to this inquiry, and the many more who attended public hearings and bravely spoke about their dire circumstances. While there is no quick fix for this complex issue, I trust that this report sets in motion the actions required to balance the insurance market and address affordability issues for strata title insurance.

Mr Graham Perrett MP

Chair

Membership of the Committee

Committee Secretariat

Terms of reference

That the House of Representatives Standing Committee on Social Policy and Legal Affairs also inquire into and report on the affordability of residential strata title insurance, particularly in Northern Australia, and factors influencing this, including:

n  (a) The magnitude of the increases in the cost of residential strata insurance over the past five years, the reasons for these increases and whether these increases are likely to be sustained

n  (b) The ability of insurers to price risk and the availability of accurate data to allow for this

n  (c) The extent to which there is a failure in the insurance market for residential strata properties either generally across Northern Australia or in some regions in particular, for example due to a lack of competition between insurers

n  (d) Whether consumer awareness of different insurance options should be enhanced

n  (e) The extent to which the nature of body corporate arrangements are contributing to affordability difficulties; and

n  (f) Whether the conclusions regarding (a)-(e) provide justification for government intervention in the residential strata insurance market, noting the existing responsibilities of Commonwealth, state and local governments, for example:

->    the Commonwealth Government has responsibility for insurance regulation under the Insurance Act and the Insurance Contracts Act and competition and consumer regulation under the Competition and Consumer Act; and

->    state governments (and local governments where appropriate) have responsibility for strata title legislation, building regulation, land use planning regulation and specific state government interventions in insurance markets (for example home builders warranty insurance, compulsory third party insurance).

The Inquiry should have regard to the following principles:

n  Individuals and businesses should be encouraged to insure themselves where practicable; and

n  Government intervention in private insurance markets is justifiable only where, and to the extent that there is clear failure by those private markets to offer appropriate cover.

List of acronyms and abbreviations

List of recommendations

Regulating, pricing and taxing risk

Recommendation 1

The Committee recommends that the Australian Government liaise with the Queensland government and urge them to implement a 12 month moratorium on Stamp Duty charged on strata title insurance for properties north of the tropic of Capricorn.

This moratorium should be implemented for the 2012-13 financial year, and extended for as long as strata insurance premiums continue to rise at a higher rate than the average for general insurance.

Decreasing risk and increasing market competition

Recommendation 2

The Committee recommends that the Australian Prudential Regulatory Authority conduct a review of the risk assessment methodologies used by insurance companies to accurately price risk for strata title insurance coverage.

The review should particularly focus on strata insurance premium calculations in north Queensland in the last five years to determine whether the major driver for premium increases was: