This sounds like you would be terminating the strata scheme, and lodging a development application for a subdivision. It would be a good idea to talk to your council about zoning and minimum block sizes for houses, together with floor space ratios. A strata scheme may have been the only way to achieve 2 dwellings on the land.
You will also need to speak to a strata lawyer about your plans, and one who is a stamp duty specialist. The common property and private lots would be dissolved upon termination of the scheme, and so no transfers of these types of property. The underlying beneficial ownership of the land on which the houses are built remains the same parties but would no longer hold as tenants in common but would each hold a separate new parcel.
It could prove time consuming and expensive, so hopefully some kind of insurance solution may be found?