This article about insurance commissions in Strata has been supplied by Jonathan Smith, Beyond Strata.
In this article, we look into some of the general questions owners may have surrounding insurance commissions within the owners corporation industry in Victoria. In particular, we discuss what managers should be doing to establish and maintain open and transparent disclosure with owners.
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My strata manager is receiving commissions from various parties connected to my owners corporation which challenges my perception of whether the manager is acting in the owners best interests.
This statement is a sentiment shared amongst many members of owners corporations throughout Victoria and across Australia.
As per section 71(2)(c) of the Owners Corporation (OC) Act 2006 (the Act), the provision of details of the insurance held by the Owners Corporation must be dealt with at the Annual General Meeting (AGM). As the AGM doesn’t always coincide with the renewal of insurance, it is common practice for managers in addition to dealing with the insurance with members at an AGM, to present insurance renewal quotations to the owners or committee at an alternate scheduled meeting, or via electronic communication, prior to the renewal of the policy. This is to ensure that the Owners Corporation’s insurance premium is competitive in the market for both policy inclusions and value.
What if a member of the OC presents an external insurance quotation to the owners, separate to the quotations gathered by the manager’s insurance provider or broker?
A possible scenario is that your manager may only present or table quotations from an insurance provider or broker in which they are an Authorised Representative (AR) for. Explained simply, the AR status, permits the manager to provide general and factual advice, with respect to insurance policies from the insurance broker or provider they are representing. In this circumstance, your manager may be limited, to an extent, from being able to source quotes from insurer’s external, to the manager’s insurance provider or broker, due to not being an AR for those insurers.
But what if the insurance quotation, external to the strata manager’s provider or broker, has better policy inclusions and value for the Owners Corporation?
In this instance, the owners should not be constrained with which insurer they choose based on whether the manager is an AR for them or not. Your manager should inform the owners that if they were to proceed with an insurance renewal through an insurance provider external to the manager’s provider or broker, in which they are not an AR for, the manager will be restricted to only providing factual information to the Owners Corporation with respect to that insurance policy.
If the owners are in agreement to this arrangement, then there is no cause for the Owners Corporation not to be able to proceed with an insurer of their choice, particularly if the insurance provider is offering better policy inclusions and value.
Will my strata manager still receive a commission if the owners proceed with an external insurance provider?
With respect to insurance commissions, a significant number of managers in the industry obtain a commission to manage the insurance aspect of the Owners Corporation including, but not limited to:
- Gathering property information to complete and submit quotation request forms, which can include retrieving the properties:
- Claims history;
- Construction and building details;
- Fire protection information;
- Security protection information; and
- If commercial strata; estimated rental turnover, tenant business information and so on.
- Circulating or tabling quotations to owners for decision including liaising between owners and broker or insurer
- Assisting owners, committee or chairperson with respect to lodging an insurance claim including, but not limited to:
- Acting as a conduit between broker or provider and owner if private property related; or if a common property related, between committee or chairperson and broker or provider;
- Guiding the owner, committee or chairperson through the completion of the claim documentation process based on the brokers or insurers instructions;
- Assisting the owner, committee or chairperson in appointing contractors based on the brokers or insurers approval;
- Coordinating meetings and access to site for contractors and/or assessors;
- Tracking the progress and following up claims to ensure that they progress as swiftly as possible;
- Ensuring the claim loop is closed and finalised after satisfactory completion of rectification works including the settlement of claims and distribution of funds to the relevant parties; and
- Keeping records of all relevant documentation
- Obtaining a valuation for the property for insurance purposes based on owners instructions; and
- Liaising with the broker or insurer with amendments to the policy as a result of the valuation, subject to approval from members.
In terms of disclosure, insurance commissions received by managers are disclosed in the standard management contract, provided to its managers from the peak industry body for Owners Corporation Management in Victoria – Strata Community Association (SCA).
In addition to the standard contract disclosure, managers should make it prominently known at the proposal stage of engagement with any prospective owners corporation. Once appointed they should communicate on an ongoing basis any receipt of insurance commission at each Annual General Meeting. Further to this, and in order to demonstrate an even higher level of transparency with their clients, the manager could also disclose their commission at the point at which they circulate the insurance renewal quotations to the owners. The manager, at that stage, can disclose the dollar amount they will be receiving in commissions, based on the owner’s selection of insurer.
By following all the above steps, it ensures that at each point of engagement with the owners and committee in relation to insurance, the manager is giving them all the relevant information, providing them ample opportunity to query any aspect of the commission and further to this allows the manager to alleviate any concerns or reservations owners may have.
Generally, if the Owners Corporation proceeds with an insurer listed on the panel of the broker or with a provider in which the manager is an AR for, the manager will receive a commission as a percentage of the base premium. According to information from a reputable insurance broker in the industry, under this arrangement, the commission paid by the insurer is at no additional cost to the Owners Corporation. It’s important to keep in mind that this may not be the case with all insurance brokers.
With that said, if members were to proceed with an external insurance quotation separate to the quotations gathered by the manager, in which the manager was not an AR, then the manager, in most cases, would not receive an insurance commission from the insurance company. In this situation, as the manager would be losing revenue, he or she would generally have the ability to directly charge the Owners Corporation for this commission amount, so long as it is written into the management contract. The standard contract from the SCA does include such a clause, for the manager to avail themselves of.
Just like any other business, for Owner Corporation management companies, insurance commission is a revenue stream that they rely upon for the ongoing viability and sustainability of their businesses. In that, in the absence of this revenue stream, inevitably the management fees would need to increase, in order to compensate for this reduction in revenue to the business.
Insurance commissions are a part of the Owners Corporation industry, at the least for the foreseeable future. If managers proactively practice greater levels of transparency above and beyond minimum acceptable disclosure requirements expected from owners, as well as remaining open and honest to owners through proper explanation and education so that they are better informed, there is no reason, why the topic of insurance commissions needs to be so hidden in the Owners Corporation industry.
This post appears in Strata News #205.
Jonathan Smith
Director of Strata Operations
Beyond Strata
P: 03 8595 4364
E: jonathan.smith@beyondstrata.com.au
“While we make every effort to ensure this material is accurate and up to date, such material does in no way constitute the provision of professional advice. We do not guarantee, and accepts no legal liability whatsoever arising from or connected to, the accuracy, reliability, currency or completeness of this material. Readers should seek appropriate independent professional advice prior to relying on, or entering into any commitment based on material published here, which material is purely published for general reference purposes alone.”
“Secret” Strata Insurance Commissions?
March 2016 – 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.
There has been a 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 has 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 Association Victoria and who comply with the conditions set out below.
Strata Community Association 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 about this topic and hope you decide to contribute.
Read next:
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Firstly, I wish to thank Jonathan for a very reasonable post and commentary on alternatives to the quoting and renewal process that Owners Corporations may be unclear about. This is particularly relevant when we consider that a Strata Manager, or broker for that matter, may only be authorised to deal with certain and limited insurers that they have a commercial arrangement with. It may not be practical to canvass the entire insurance market year on year, but it is important to recognise that there are limitations that intermediaries are subject to and the Owners Corporation may be worse off by not considering alternatives.
There is one glaring mis-representation in Jonathan’s post however, that reads:
“According to information from a reputable insurance broker in the industry, under this arrangement, the commission paid by the insurer is at no additional cost to the Owners Corporation.”
This is blatantly untrue in any reasonable understanding of how commission payments are made.
Commission payments are calculated as a percentage, overwhelmingly at 20%, of the base premium. This is absolutely in addition to the actual cost of insuring the property and is passed on to the Owners Corporation (and Owners) to pay.
Statements like this are dangerous, misleading, and do not assist in providing transparency in the payment of commissions that the Owners Corporation need to fully consider. It should certainly make one consider just how ‘reputable’ an insurance broker it is if this is their understanding.
Thank you Richard for your feedback and kind words.
With respect to your comments in relation to ‘commission paid by the insurer is at no additional cost to the Owners Corporation’. Please be mindful, as indicated in the article, this was information provided to me directly from the insurance broker, this was not my personal opinion or view. Further to this I did add that ‘It’s important to keep in mind that this may not be the case with all insurance brokers’.
Always open for feedback and discussion around the topic, if you would like to discuss further please do not hesitate to make contact with me.
Regards,
Jonathan
“Secret” Insurance Commissions? I don’t think so!
I think there is best practice (do not accept commissions and if you do – they go back to the Lot Owners AND are cleary shown in the AGENDA) and there is actual practice. Accepting a commission for being a Authorised Representative is a CONFLICT of INTEREST and the argument that if they did not get the commission they would have to charge more for their time misleading.
A manager is paid for work done by owners and then they earn commisions from contractors and insurance and fees charged to other bodies – as stated by Consumer Affairs -at the moment it can cost up to $50 for a simple photocopy of registered owners..
It is certainly not transparent just how much a Manager earns by being a Manager..
This is the information that the Owners need to know before deciding that they would need to make up the difference if commissions were aboloshed,
As a broker in Victoria, I face the above noted issues on a daily basis. I manage a lot of strata policies and find myself battling with BCM’s every renewal.
You see, as a broker, I refuse to pay any commissions to a BCM. I have studied and obtained my qualifications, spent copious amounts of time understanding the product and the insurance market and negotiation the placement, ongoing management and claims. Why would I pay a BCM purely for bringing me the business? I prefer to deal directly with the committees for full transparency as often BCM’s will not put our terms forward if they know there isnt anything in it for them.
The reality is, most BCM’s are authorised representatives or agents of certain strata insurers. They undertake very, very basic training and are then authorised to sell those insurers products. This results in a huge conflict of interest. How? As an authorised rep or agent of the insurer, the BCM is obligated to act in the best interests of the insurer, which is at odds with what the OC is paying them for.
So I earn my commission (10-20%, paid by the insurer) and I also charge a small broker fee. In exchange for this, my client receive a truly independent and unbiased broker to obtains the best possible terms, understands the coverage and policy exclusions, terms and conditions, can negotiate directly with the insurers and is experienced and involved with the claims management. Why would you allow your BCM to purchase your insurance when they cannot do any, if not all of that.
I totally agree. Like you l was a broker who studied for my professional qualifications and spent my career working in Canada. I also taught insurance for the Insurance Institute of Canada. Our building had an expensive equipment breakdown so we claimed under our breakdown policy. [Removed by Admin] denied the claim but eventually paid it after l countered it was sudden and accidental, plus we had a maintenance contract and the breakdown was impossible to predict. Our strata manager who is àn excellent property manager had no Idea what l was talking about. It is beyond belief that we have a system which allows people to be an insurance agent, provide quotations with multiple companies,get paid the same commission as a broker then claim that legally they do not have to provide advice. All we asked for was their recommendation as to which policy they felt was best for us. after they presented us with 3 options.This is morally wrong and the law needs to be changed. It’s akin to a dealership selling a brand new car then refusing to repair it under warranty because they only sell the car. A short sales course provided to property managers who are then able to sell their products is just not acceptable. What the heck is a property manager who represents multiple insurance companies if they are not brokers!! It seems to me they have no interest in their client’s only in the money they receive
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.
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.
It’s the insurance brokers job to explain insurance…not the strata manager
Hi Carol so what is the strata manager if not a broker. They were able to provide 3 quotes with different underwriters so to me after 40 years as a broker that makes them a broker. If they walk like a duck, waddle ànd quack they are a duck. How did we ever arrive at a situation where people are paid thousands of dollars to sell insurance they don’t understand and it’s legal
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.