What’s the real issue in the strata sector?

What’s the real issue in the strata sector? | Insurance Business Australia

Insurance News

What’s the real issue in the strata sector?

“That’s the tip of the iceberg,” says CEO

Insurance News

By
Daniel Wood

This week the strata sector was brought face to face with serious issues including excessive fees, lack of transparency and poor treatment of apartment owners. The ABC Four Corners investigation clearly showed that strata managers, insurance brokers and other industry stakeholders are involved in unethical conduct.

“We are at a critical juncture, and now is the time to push for a government inquiry while this issue remains at the forefront of our elected officials’ minds,” Tyrone Shandiman (pictured above) told Insurance Business. Shandiman is chair of the Australian Consumers Insurance Lobby (ACIL) and a broker in the strata sector.

IB has reached out to other brokers to find out their views. A couple were willing to answer questions, others spoke off the record. Most preferred not to comment.

A focus of the Four Corners’ report, apart from strata managers, was Steadfast Group. The firm, one of the biggest players in Australia’s strata industry, has ownership stakes in brokerages, underwriters, developers and a premium funder involved in the sector.

Longstanding strata issues

The brokers that were willing to talk to IB said these strata issues have existed for a long time. They were relieved that the ABC had exposed them. Some also expressed respect for what industry veteran Kelly has personally done for the wider insurance industry but said his firm’s business model of vertical integration is too open to manipulation. They said other firms in the strata sector have the same vertically integrated business model and are responsible for similar abuses.

However, the ABC chose to single Steadfast out for scrutiny.

“We don’t really see the ABC report as a revelation because we’ve known about this for a long time,” he said. “We put in a submission to Mr. Trowbridge.”

The Bellrock CEO said Trowbridge’s main finding was that transparency and disclosure of commissions would solve most of strata’s issues.

In the ABC report, Gina Cass-Gottlieb, chair of the Australian Competition and Consumer Commission (ACCC), supported a ban on strata’s undisclosed commissions.

“That’s the tip of the iceberg,” said Chiarella. “If you have an insurance broker, a strata manager, and even an underwriting agency, lawyers and remediation consultants owned by the same people then you’re not getting competition because they’re all wanting the same – that’s the ultimate issue.”

He explained how, typically, the conflicts of interest, fee and transparency issues can arise.

Chiarella said strata managers pitch their services to owners’ corporations and say they won’t charge a fee. They then bring in their preferred insurance broker – who may be owned by the strata manager – and then select their insurance recommendation.

The strata manager’s fee is built into the insurance commission and, according to the ABC report, can be as much as half the premium. The broker splits this fee or bills the owners’ corporation separately.

“A strata manager should not be remunerated by proceeds of insurance,” he said. “They should be remunerated for being the strata manager to the owners’ corporation.”

Chiarella said the underlying issue is the related financial interests among strata service providers that skew the advice given to the owners’ corporations.

“That’s causing the problem,” he said.

However, like many industry stakeholders, Chiarella said there are benefits from the vertical integration model used by Steadfast, including efficiencies and cost savings. However, the ABC investigation has demonstrated that this model is being manipulated.

In order to stop the manipulation, Bellrock, he said, supports “more stringent regulation of the strata industry.”

“Competition will naturally materialize if all the parties there do not have any conflicted remuneration or financial interests in other stakeholders that determine or dictate what service providers are being used,” said Chiarella.

Act in the client’s best interests

Daniel Berry (pictured immediately below), partner with Dudgeon Berry Insurance Group, agreed to give his view. The broker, who runs a small family firm in Lismore, summed up his key takeaway from the ABC’s investigation.

“You should always be acting in the best interests of your client,” he said. “Consent must always be given and all communication should be in a clear and transparent manner.”