One year. One loop around the sun.

That’s how long your strata insurance policy runs for.

It seems like a reasonable frame of time for an insurance policy but is there a better length of time?

As we know, our strata committee volunteers have a lot on their plate and will generally delegate what they can to their Strata Manager. Unfortunately, this usually includes one of the biggest expenses for a scheme and the single largest financial risk transfer for all owners – insurance.

No doubt the Strata Manager will exercise their fiduciary duty and purchase a policy that offers the most value however this is a task that needs consideration by the committee.

So what happens if we envisage a world where five years is the normal policy term?

1. Consensus can be obtained by the owners

Tediously going through insurance quotes at every AGM would be very hard work which is probably why I’ve never seen it done. Doing this once every five years however, means that it could be an option. Online AGM voting protocols also means this could be a more viable method in obtaining owner consensus.

2. More care will go into the decision

The strata committee is going to pay a lot more attention to buying a $50,000 policy compared with their normal $10,000 policy.

3. Price in the aggregate will reduce

As insurers must only quote once every five years, their cost of business goes down. They can also price more competitively with the knowledge that the insured will not have a big claim and then move to another insurer.

4. There’ll be less over/underinsurance

In most buildings a professional replacement valuation is undertaken once every five years per the legislation. Insurers would no doubt offer a provision to account for escalation in the sum insured over the five-year period which reduces risk of over/underinsurance.

5. Flexible payment terms will be available

It makes sense for strata bodies that collect levies quarterly to pay their insurance premium quarterly. A five-year commitment would allow insurers to be more flexible with payment arrangements and reduce cashflow burdens on Owners Corporations.

6. Insurers can more accurately rate risk

When a five-year policy is at stake, the insurer can take more time to understand the building and the risks associated with it. Previously, an insurer may not have considered the risk mitigation methods the building has in place, but a larger value policy allows the resources to do this.

7. Liability policies will have a lower chance of denial

Some liability policies are ‘claims-made’ policies with exclusions surrounding knowledge of the issue before commencing the policy. When an Owners Corporation changes insurer, a claim may be denied if they knew about the issue but the case against them wasn’t made until the new insurer was on risk. Reducing changes in insurer would remove this gap.

So it looks like a win-win for both insurer and insured!

Know of any downfalls of longer policies? Let me know in the comments!