In our latest Strata Newsletter (2 March, 2016) we included an article about insurance commissions published by the Townsville Bulletin – Insurance advocate calls on State to ban manager’s commission.
From the article: SECRET third party commissions of as much as 20 per cent being paid by insurers to body corporate managers are costing unit owners thousands of dollars extra in premiums and should be banned, North Queensland insurance advocate Margaret Shaw says.
Knowing it would be a controversial topic across the strata world, we chose to include the article in our newsletter in order to inform our members of its existence and open discussion on the matter.
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There has been buzz in the industry around this topic for quite a while:
Strata managers stand firm on insurance commissions
NSW avoids strata insurance commission ban
NSW Strata Insurance Commissions – CHU Update
SCA: Understanding Strata – Insurance Commissions
Not long after publishing our newsletter, I received the following response from Greg Honeyman, Strata Specialist, MBCM Ballarat:
“Secret” Insurance Commissions? I don’t think so!
This article requires some serious refutation, and the advocate Margaret Shaw really should get her facts together.
In Victoria, for professional Owners Corporation Managers who are members of the peak industry body (SCA Vic), any insurance commissions are absolutely transparent. In fact at every AGM (and whenever body corporate insurance is discussed), we provide a disclosure statement to all owners. To make an across-the-board accusation of secret commissions is for Ms Shaw to tread on extremely dangerous legal territory.
It is accepted by all right-thinking owners that the payment of insurance commissions to professional managers does not cost unit owners more. Quite the opposite in fact. The current practice keeps costs down. Professional managers undergo training in strata insurance products and are viewed by the insurance industry as a key part of the insurance process, particularly in ensuring that competitive quotations are carried out properly and that owners receive the best possible insurance coverage for their needs at the best possible prices.
Without these professional managers, the insurance companies would have to employ large numbers of sales staff to carry on the job of quoting and providing the correct form of insurance to the many thousands of strata properties in the country. This is what would end up costing the owners more. Not only that, but I have serious doubts whether owners would then end up with the correct insurance.
Strata insurance is incredibly specialised. The best people to interface with owners corporations are the professional managers who know the properties and know the owners. The system that is currently in place is the best possible system, and any commissions are hard earned.
Generalist, sensationalist and inaccurate comments by people like Margaret Shaw will result in the worst possible outcome for owners of units in strata communities, both in terms of the quality of insurance and cost. And to expect owners to arrange their own insurance is a recipe for problems, increased cost and potential disaster. The best possible strata insurance is a single blanket cover through one insurer.
I would agree with Ms Shaw however where it comes to strata managers who are unprofessional, unregistered or not members of the industry peak body. Our profession has no place for cottage industry amateurs or shoddy performers.
As an industry leader, the MBCM group is passionate about ensuring professionalism and transparency in everything we do. We have 48 members in our franchise group and all are members of the SCA (Vic). My sympathies go out to Ms Shaw and her colleagues if they have been the unfortunate recipient of poor management practices.
The industry seen far too many Owners Corporations which have attempted their own insurance and ended up with a disaster on their hands:
- Under insurance (and in some cases gross over-insurance).
- Conjoined units insured by separate insurance companies (fertile ground for dispute in the event of a claim).
- No common property insurance (exposing owners to personal liability).
- Expired insurance (I am dealing with one of these as we speak, where they simply forgot to renew – 15 months ago).
- Non-existent insurance (it won’t happen to me).
Professional managers ensure that Owners Corporations are protected and insured properly and in a timely manner.
For the record, I have attached the MBCM strata management disclosure.
DISCLOSURE OF INSURANCE AGENCY FEES AND COMMISSIONS
The purpose of this memorandum is to facilitate uniform disclosure of insurance agency fees and commissions received by Owners Corporation Managers who are members of Strata Community Australia Victoria and who comply with the conditions set out below.
Strata Community Australia endorses the current practice of Managers deriving insurance commissions on insurance premiums paid on behalf of Owners Corporations as this contributes to a lower level of management fees and has no effect on the cost of insurance to the Owners Corporation. The conditions applicable to endorsement by the Institute are as follows:
- Such fees and commissions are properly disclosed to clients.
- Such fees and commissions do not increase the cost of insurance to Owners Corporations.
- Such fees and commissions do not exceed 20% of total premium payable by Owners Corporations.
- In all cases the best interest of the client is the paramount criterion when presenting quotations from particular insurance companies or placing insurance with any insurance company or broker.
The level of insurance agency fees or commissions by Owners Corporation Managers varies and it rarely reaches the limit set in condition 3 above. This upper limit of such income has been specified in this memorandum to simplify the process of disclosure.
The distribution of this document by the Manager to the Owners Corporation clients will serve as an announcement that such income is being received and that there is compliance with the restrictions as set out above.
We encourage discussion around this topic and hope you decide to contribute.
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Our strata manager recently presented us with 3 insurance renewal questions. We asked the manager which one they recommended as we have no Idea how to choose. The manager who is our insurance agent replied that she doesn’t give advice. She receives 20% commission for handling our insurance. Please could l have your comments as we are lost.
It’s the insurance brokers job to explain insurance…not the strata manager
Hi Shaun
We have received the following reply to your comment from Frank Higginson, Hynes Legal:
To me the answer is to get advice from someone who is qualified to give advice. That is someone with the right qualifications etc
And I would observe that it isn’t a secret commission if it is disclosed (as is obviously the case here!)
Firstly thank you for replying to my email. What really bothers me is we have a system in place which allows strata managers to sell insurance products, receive in our case over $3000 commission for a product they are not competent to advise us on. I don’t blame the managers for selling insurance and using a legal loophole to say we can’t provide advice however we are placed in a position where we have to pay another person to comment on a product that in effect the seller says they don’t understand.All we asked the manager was you gave us three quotations, which one do you represent. and they refused to answer.
Over the last 2 or 3 years, I have been asked to review the strata insurance arrangements for a large number of QLD complexes, ranging in size from the small ‘6-packs’ up to those with more than 100 units.
I feel I have covered enough complexes to conclude there are 4 key risk areas in relation to strata insurance…risks which I would regard as both systemic and endemic across QLD:
1: Unreliable, biased Valuations. These are the foundation of strata insurance, and if incorrect…everything else is compromised.
2: Unreliable, excessive annual uplifts for those years between Valuations. These uplifts, generally starting at 5% and often rising to 8%, are bad enough for the first year; to keep offering them year after year notwithstanding all of the historical data confirming they are grossly excessive, does not reflect well on either the Insurers or their Authorised Representatives. The sooner ASIC looks closely at this practice, the better.
3: Non-Competitive Quotes Sourced by Body Corporate Managers (BCM) from a limited number of Insurers, resulting in the same Insurer being accepted year after year. Some BCMs seem to have no difficulty sourcing one or two non-competitve quotes from Insurers other than those the BCM is registered with as an Authorised Representative and from whom they then take the full 20% commission. Given the competitiveness between Insurers eager to share in such a lucrative market, it is surprising that any one Insurer would be able to supply the most competitive quote year after year after year, and for all of the clients of that one BCM. It is also not surprising then that nearly every time I’ve been able to persuade a Body Corporate (BC) to take the insurance off their BCM and go to a truly independent Broker, that Broker has been able to source, from a wide range of competing Insurers, a substantially cheaper premium than that offered by the their normal Insurer. The sooner ASIC takes a look at these arrangements, the better.
4: Excessive Premiums @ 20%. I understand it is standard practice with the Insurers to pay 20%. It then becomes a question as to who gets to divvy up this 20%…the Broker, the BCM, or both. It is worth remembering here that the 20% comes off a very large base: strata insurance covers the whole building, and the Building Sum Insured (BSI) generally runs into millions of $$$s. With a Premium Benchmark of around $800 to $1000 for every $1M of BSI, the Premiums generally run into thousands of $$$s every year…and 20% of those Premiums adds up to a lot of money. Any BCM with a reasonable number of complexes will be taking in a lot of money for very little cost to them. IT is surprising that a really switched on BCM hasn’t realised the competitive edge it would give their business if they were prepared to hand back to their clients at least 25% of their 20% commission ie 5% of the total premium. I have found at least one truly independent Broker who already follows this practice. By sourcing quotes from a whole range of Insurers, and then handing back some of the commission to the BC, this Broker nearly always comes up with a final package for the BC which saves them thousands of $$$s every year compared to what they’d been paying via their BCM. And there is nothing secret here…this Broker is quite open about it.
Across all of these Risks, there is another pattern emerging. This involves the relationships between a number of the main players. For example, the BCM is required to disclose any relationship with an Insurer, and any relationship with a Broker. But the BCM is not required to disclose any relationship between the Insurer and the Broker.
With all respect to anyone speaking up for the strata insurance game in QLD, I do think an independent review, say at the Royal Commission level, would lead to large scale changes to this game. There are too many complexes which have been rorted for too many years to allow the status quo to continue.
In NSW the commissions to strata managers undoubtedly are counted as important extra income. They may be viciously fought for. We had the experience, when the Owners Corporation decided to change strata managers, that the outgoing strata manager pre-paid our annual premium to get the commission. He told me there was no way the new strata manager was going to get it. An unholy row then broke out, ending with the strata manager being forced to disgorge his commission, which then went to the credit of the new manager.
It could be argued that strata management fees would rise if the commission system was abandoned, but at the moment there’s a lack of transparency with few strata owners realising what goes on, and the annual insurance item being waved through at the AGM.
We have received the following response from Margaret Shaw:
I’m just an unpaid retired IT Consultant trying to get fair and affordable premiums for North Queensland. I’ve taken the time to read the Victorian and NSW strata legislation (which is why there has been a delay in my response) and I hope Greg Honeyman has now taken the time to read the Qld BCCM Act.
All States have different legislation and there are many different types of Body Corporate Managers, some more professional than others. The article in question refers to Queensland only, and for people’s information I never used the term “Secret” I use the term “not clearly disclosed” and without disclosure you can’t negotiate, and we have to negotiate.
Why are we suddenly fighting commissions up here in Qld? We’re fighting everything to do with insurance!!
In 2011 the insurance premiums for Strata Title unit buildings, particularly large complexes and Tourist Resorts, in North Queensland increased by 200-500% overnight and without warning or claims. According to the Hon Warren Entsch MP he has examples of 800-1000% in Cairns. I believe this crisis has cost people in North Qld more than $1B in additional premiums over the last 4 years.
I found the MBCM strata management disclosure “DISCLOSURE OF INSURANCE AGENCY FEES AND COMMISSIONS” exceptional. I’ve certainly never seen anything like it, and I won’t until Qld legislation is changed.
The Federal NAIP Taskforce Report was released last Friday (4th March) and it quotes:
“Regulating commissions to strata managers: Commissions paid to strata managers when they purchase insurance on behalf of an owners’ corporation are generally calculated as a percentage of price, which means they may act as a disincentive to seek best value for money. In most states and territories, legislation already requires strata managers to act in the best interests of their clients and to disclose commissions.”
The situation we are experiencing in Queensland seems to differ from VIC and NSW. The insurance commission disclosure for BCMs is more often than not contained within the Management Agreement, and is from between 5-20%, depending on the Insurance Company.
Fortunately, BCMs and Brokers are a bit sheepish now about how much extra it is costing complexes in Qld to use them, so when a renewal comes out we ask them how much both parties are getting, in writing. As a result you normally get the following type of email (the following is from an actual email from a BCM):
For the *** (insurer) premium the broker receives from the insurer 20% of the base premium (excl. GST, stamp duty) and pass on to *** (the body corporate managers) 15%, thus keeping 5% for themselves. *** (the body corporate managers) are prepared to consider a reduction of its share of the commission. I will get back to you on this tomorrow after consulting with the broker.
This resulted in a reduction of commission and therefore, outlay for the complex. You can’t negotiate until you ask.
Unless the strata property is small, valued at less than $5M and has a competent Body Corporate Committee, I believe a broker should be used for obtaining insurance quotes.
When a Management company gets a commission direct from an insurance company (not paid for by the owners):
When a Management company gets a commission from a “preferred” broker then that can add $1,000s to the bill because our local brokers don’t charge 20% of base premium for placing insurance, they charge less and in some cases a set fee.
The things that have to be thought about for Qld in particular:
According to brokers, you may also be interested to know that there are now brokers who charge a 10% fee in addition to receiving a 20% commission. They pay the strata manager the 20% commission and keep the 10%. The client ends up paying for it in the long run. How this works in the customers favor I don’t understand.
And for my final comment…
In 2015 the NSW Government implemented significant strata law reforms, Qld needs similar changes.