A broker has recently made some public statements of concern with how StrataRatings operates and this post will respond to each of these concerns. The original comment can be found here.

Let’s firstly identify the flow of cash to understand any financially driven biases.

Broker: Gets paid commission (usually 20%) when an Owners Corporation places a policy through them. Therefore, are incentivised to encourage schemes to use their Broking services.

StrataRatings: Gets paid a flat licencing fee ($1,250/qtr) from insurers when they use StrataRatings logos in their marketing. No incentives exist as to who with and how schemes place their policies.

The below are the concerns raised and responses to each concern.

Concern 1
Do the individuals who rate the products have day to day dealings with insurers?

No. The ratings are solely based on the coverage provided by the standard PDS each insurer offers. As such, day-to-day behaviour is not something that is assessed.

Concern 2
How much in actual dollars do insurers pay StrataRatings?

Since the commencement of our operations in 2017, we have disclosed our licencing fee on our website. We do this to ensure full transparency. Our licencing fee is currently $1,250/qtr per insurer.

Concern 3
Does this remuneration cause a conflict of interest?

All participating insurers pay the same fee to licence our logos, regardless of the Rating their policy achieves. As such, there is no conflict of interest or incentive for StrataRatings to alter a rating. We determine ratings without fear or favour.

Concern 4
Why don’t the ratings consider the insurers ‘attitude’ toward paying claims?

Our sole purpose is to rate the standard PDS that the insurer offers. Whilst an insurers attitude towards claims is an important aspect, it is very difficult to quantify. The dispute statistics from the FOS/AFCA are not statistically significant enough to make any meaningful inferences from.

Concern 5
Why is foreign insurer, Lloyds of London, considered to be a riskier insurer than Australian based insurers?

Insuring with an overseas incumbent is inherently riskier than with an Australian-based insurer. Whilst legislation provides insured owners certain protections and a security trust exists, pursuing an international insurer is more complex and thus riskier than pursuing a local insurer. Lloyd’s also has no reputation risk. Behaving unreasonably at claim time would not have the same reputational implications for Lloyds as it would for a well know Australian insurer. As such it is a detracting factor in the ratings.

Concern 6
Why is availability to purchase, a factor in the ratings?

Owners have the option to place their policy directly with an insurer or through a broker. It is common practice that a broker will instruct the Owners Corporation to pay the premium into their trust account rather than directly to the insurer. This process adds intermediary risk due to the misappropriation that can occur (as reported here, here & here just in the past six months!). An insurer who only distributes their product through brokers is essentially forcing intermediary risk onto their clients. As such, it is a detracting factor for an insurer to limit their distribution method.

Concern 7
Why does the StrataRatings website encourage strata managers and committees to learn more about insurance rather than wholly outsourcing to a broker?

Transferring risk effectively and economically is a complex task and instructing a broker without understanding what you are seeking and the financial biases in play may not always lead to the best outcome. Education about the difference between general and personal advice, remuneration structures and intermediary risk are key things committees and strata managers should learn prior to considering whether the services of a broker would benefit them.

StrataRatings aims to provide a resource to assist Owners Corporations in their decision-making process. We rate just the PDS which forms a small part of any decision and by no means make the role of a broker redundant. In fact we see it as a complimentary service and have brokers refer clients to our webpage to independently assist with policy comparison.