#18675
Jimmy-T
Keymaster
Chat-starter

    Here is some further reading on the insurance commission debate.   Below is a review of all the major points by Paul Keating (no, not that one) managing director of our sponsors CHU Insurance.  Attached HERE   is a paper he prepared for the SCA (strata managers) NSW conference last year.  Paul points out that the ban would not affect insurers financially either way since they would still pay commissions to brokers, for the reasons explained below.

     

    I share the following with you if for no other reason but to help demystify some of the arguments, perceptions, and areas where I think knowledge could be improved for all stakeholders in this debate.

    (a)    A paper I was asked to put together for Strata Managers as a part of the SCA NSW conference last year. Essentially, the message here is that there is a need for Strata Managers to get properly authorised by the Australian Financial Services licensee transacting insurance business with the Owners Corporation (or suffer serious fines). And, that proper authorisation is good for consumers.

    (b)    A summary of the issues (below) I was asked to put together (as I saw it) that has led to the proposed ban on Strata Managers receiving commissions. It’s not complete, but a start.

    I am all for an open debate on this, with all stakeholders having access to full and accurate information. There is some data that needs to be collected to support the underlying claims, and I believe this needs to be done to ensure a fair outcome for all involved, and that we address the true consumer issues in a balanced and sustainable way.

     



     

    What is the proposed ban about?

     

    Consumer Concerns:

    (1)    Perception that strata managers ought to be free of conflicts of interests (OCN)

    (2)    Perception that strata managers should not receive commissions (or any benefits) from third parties

    (3)    Perception that commissions on insurance is a disincentive to the strata manager to reduce premiums

     

    Options to address:

    (1)    The is nothing illegal about being in a Conflicts of interest, it is common, and the notion that any person can be free of them is almost improbable. Conflicts of interest will be inevitable for both Strata Managers and the individuals whom make up the Executive Committees. Directors of companies are often in positions of conflicts. The key issue is how these conflicts of interest are dealt with, in an open and transparent way. This inevitably leads to a need for an ongoing process of continuous disclosure. I have suggested a “Standing Notice of Interest” be created and refreshed at every Executive Committee meeting, to ensure all members are (a) aware of contractual arrangements already in place, including commissions, and (b) self-declare their own conflicts that inevitable arise (like using their own insurance broker, using their own tradie for repairs, etc).

     

    (2)    There is a need to demystify the insurance process, and better understanding of the financial Services regime, and consumer benefits. For example;

    • An Owners Corporation is an ‘unlimited liability’ legal entity, and its members (owners) expose themselves up to their full net wealth
    • Owners Corporations need to insure, its compulsory under legislation. This is a key function performed by Strata Managers. However, insurance is finite, and this creates inherent risks and financial gaps for both owners and their Strata Managers.
    • Australian Financial Services (AFS) law, now embedded within the Corporations Act, defines the activities that constitute an ‘arranger’ (S766C), and the insurance functions that a Strata Manager normally performs would fall within this definition.
    • A Strata Manager as an ‘arranger’ must be trained and appointed as either an distributor or (preferably) as an authorised representative of a AFS licensee. Once appointed, the Strata Manager is subject to supervision and audit of that AFS licensee. Strata Managers, as with Insurance Brokers, only get paid commission by a AFS Licensee if they are successful in the placement. They can do a lot of work for no reward.
    • Owners benefit from this regime because the AFS licensee must provide Professional Indemnity protection for the activities of the Strata Manager within that appointment/authorisation. Given this mismatch between unlimited exposure of owners, and the finite nature of insurance, this is valuable consumer benefit that rarely gets consideration by the members of Executive Committee’s for Owners Corporations.
    • Insurance Companies pay commission to Insurance brokers and/or Strata Managers because they are their sales and distribution channels, and can be more efficient that employing their own sales and distribution teams. Many brokers in turn pay or rebate a commission back to the Strata Manager. Insurers also require Insurance Brokers and Strata managers to perform many administrative functions such as;

      • Collect and maintaining risk data and claims histories, to present the most accurate profile of the Strata facility, for Insurers to accurately price the risk. Because the Strata Manager gets to know the facility far more intimate than a broker could, their data tends to be more accurate for pricing purposes.
      • For commercial premises, where business activities of occupiers can readily change, Strata Managers can generally maintain a far more accurate schedule for insures
      • Completion and lodgement of documentation, and collection and payments of premiums.
      • Receipting of certificates, and assisting with certificates of currency
      • Coordination of administrative activities, and repairs, in the event of a claim.

    • Despite these activities, the Insurer will only pay the commission to the Brokers or Strata Manager if the business is successfully placed with them. Many brokers do not have the information required, and simply rely on the Strata Manager to provide this. So there are many instances where Strata Managers will remain unrewarded for these activities, and will need to charge fees.
    • If insurers trade direct, they generally have to do all the administrative, marketing and sales work, hence why their premiums tend not to reduce if a Broker or Strata Manager is not involved and commission not paid.
    • Strata Management contracts provide for base management fees to be discounted to take into account other steams of income, like insurance commissions. Owners Corporations have a choice to allow commission or not prior to contract being entered into. Both the Financial Services regime (Corporations Act) and the Property Stock & Business Agents Act legislate compulsory disclosure.
    • However, it is the Owners Corporation that ultimately decides where to place the insurance, but they seek guidance from their trusted advocate (their Strata Manager).

     

    (3)    There is no evidence to suggest that the perception that commission are an incentive to keep premiums high. The Strata Insurance market is highly competitive, and often insurance programs are transferred between insurers for difference less than a hundred dollars (albeit that this creates a risk far higher than the perceive monetary saving). Strata Insurance products are different, and the scope of cover they indemnify for can vary greatly. The cost of claims tends to be the biggest driver of insurance premiums, inflating around 12% per annum at present.

     

    Unintended consequences:

    (a)    The government plans to intervene in an area where there is no evidence of market failure. Whilst there are individual stories of consumer concerns, there is no evidence of a sustained pattern of complaints at ASIC, FOS, or within other industry bodies.

    (b)    The intervention could be regarded as restrictive trade practice, and could lessen competition (300+ Strata Managers cease insurance trading on behalf of their Owners Corporations).

    (c)    The debate on commissions as a form of revenue, despite its full disclosure in Management contracts, is immaterial compared to the risk and benefits of having your Strata Manager authorised to give general advice by a AFS licensee. There are very few AFS licensees who will appoint Strata Managers with this authority, to the detriment of consumers. Why? Because it is and expensive regime, far cheaper for them not to protect the Strata Manager. Owners should insist on this authorisation for their own benefit. This issue must get back on the governments agenda.

    (d)    This proposed ban is not a prohibition of commission payments within the Strata sector, rather the ban applies to Strata Managers only, a form of restraint which will be to the benefit of many other financial services licensees (mainly insurance brokers), or their authorised representatives and distributors.

    (e)    There appears to be an assumption that if commissions are banned for Strata Managers, that premiums will automatically reduce. That is not accurate. Insurers will still distribute via Insurance brokers and pay commissions, so premiums will largely remain the same. However, Strata Managers will need to reprice their services to ensure they are profitable, presenting a net increase in cost to Owners (and tenants). For smaller schemes, the increase will be significantly more on a time cost basis than the commission received, because their premiums are so small.

    (f)     Strata Management companies repricing will result in either Owners accepting the increases, or the costs increase simply becomes unaffordable. Strata Management services will be cut back, or Owners will elect to self-manage, neither outcome positive for consumers. Strata Management companies will need to drastically cut costs (redundancies) if they can’t raise their revenue, sell out, or go under. All of these outcomes are not ideal for competition, will result in cost increases for owners and tenants alike.

     



    Kind regards,

    Paul Keating 
    Managing Director

      

    The opinions offered in these Forum posts and replies are not intended to be taken as legal advice. Readers with serious issues should consult experienced strata lawyers.