The strata and property management giant PICA is digging in on its rejection of plans to end insurance commissions for strata managers, warning it could cost owners hundreds of millions of dollars a year.

With both the NSW government and the strata managers’ professional body moving towards ending the controversial practise of strata insurance providers paying commissions to strata managers who bring them business, the PICA Group has urged a “balanced and transparent” approach to proposed reforms.

In a media release, PICA Group warns that such a move would shift costs estimated at $100 – $150 million annually onto consumers potentially undermining affordability and service quality.

‘Removing insurer payments without a sustainable replacement mechanism risks increasing costs for owners and destabilising the strata management sector,’ said Bobby Lehane, Managing Director and CEO.

‘We support reform, but it must be fair, transparent, and economically viable for all parties; the consumer, the insurers, the broker and the strata managing agents.’

PICA Group, one of Australia’s largest if not the largest strata management company, raised concerns with the recently adopted SCA NSW plan to phase out commissions over the next three years.

“This may effectively create a net market model, a practice where insurance products are priced without commissions meaning the cost of adviser or distributor remuneration is separated from the product itself,” they say, arguing that, if commissions are made illegal, insurers are likely to retain windfall gains rather than transfer full savings to consumers.

“Any initial savings consumers might experience are likely to be short-lived, as insurers will inevitably optimise profitability,” they continue.

“Indeed there is no clear evidence in Australia that banning commissions has led to sustainably lower premiums across broad insurance markets, as external factors such as rising cost of claims have a much greater impact on premiums than commissions.”

Instead the PICA Group proposes a fixed fee model. It would be funded by insurers and adjusted to the consumer price index (CPI), replacing commission-based payments.

‘Consumers should not bear the burden of insurer distribution costs,’ Mr Lehane added. ‘Strata managers play a critical role in facilitating insurance coverage, and their contribution must also be recognised and sustainably funded.’

However the PICA stance has drawn an immediate backlash from strata owners, insurance clients and strata managers alike, who say that insurers paying a fixed fee, as proposed by PICA, is just commission by another name and the cost would still, ultimately, be borne by the owners in increased premiums.

“Many of our members had already replaced commissions, well ahead of our announcement, while others have now commenced this process and SCA (NSW) remains commitment to supporting them on this journey,” Robert Anderson, President of SCA-NSW told Flat Chat.

“I believe this has led to a positive industry conversation about the critical value of strata managers and signalled a way forward for SCA (NSW) members and the broader sector to provide a more transparent and cooperative approach within strata insurance.”

David Glover, managing director of the strata owners’ peak body the Owners Corporation Network (OCN), was even more scathing.

“PICA needs to get the message: commissions are going, whether you like it or not. Consumers have had enough of this deception,” he told Flat Chat. “If PICA hasn’t got its act together, that’s their problem. Let their competitors take the spoils. Honest strata managers are fed up with being low-balled by competitors who hide their remuneration behind commissions.”

Tyrone Sandiman, chair of the Australian Consumers Insurance Lobby (ACIL), agrees: “The [PICA] release paints an unnecessarily pessimistic picture of the proposed reforms and, in doing so, undermines the credibility of the strata management industry,” he told this website.

“The claim that insurers would retain windfall gains rather than pass savings on to consumers simply doesn’t hold up in a competitive market — any insurer that failed to pass on savings would quickly lose business. “

The long-standing issue over insurance commissions and the undue influence they exerted on strata managers assisting owners’ corporations in finding the best strata insurance – which is mandatory – was brought to the fore last year when the ABC TV Four Corners report The Strata Trap exposed owners corporations being charged huge amounts, sometimes over 50 per cent on top of insurance premiums, ostensibly to inflate commissions.

Meanwhile while some large companies were routinely disguising them as fees for service, funnelling the money into their corporate accounts through subsidiaries, while telling owners that they didn’t collect commissions, a fact they were obliged to declare under strata law.

“PICA Group’s alternative of a ‘fixed fee…funded by insurers’ sounds like a commission to us,” David Glover continued. “There is no ‘funded by insurers’. It’s all paid for by the consumers.

“This continued nonsense from PICA, acting as though the move away from commissions is rushed and ill-considered, is insulting to the many, many people who have given it a lot of thought. And it’s making PICA look ridiculous.’ 

The PICA Group says that owners should be given the choice to pay an equivalent fee directly, opting for no remuneration to strata managers from insurance parties should they wish.

The company adds that industry stakeholders and regulators should consider a “phased and thoughtful transition with well understood replacement mechanisms” that “protect consumers, support transparency, and ensure the continued viability of the strata management sector.”

Tyrone Sandiman of ACIL is highly sceptical: “Removing strata manager commissions strengthens competition by ensuring strata managers are driven solely by finding the best deal for their clients. It’s hard to imagine a company as large and influential as PICA would stand by if insurers acted in the way they suggest.

“These reforms are about transparency and fairness. Strata managers can and should recover their costs openly through their management fees, as shown on AGM papers, rather than relying on hidden commissions.

“The industry must accept that the current model, which places strata managers in positions of conflict inconsistent with their fiduciary duties, can no longer be accepted as the status quo.

 “Once reforms are implemented and the transition is complete, the sector will adjust, consumers will pay a fair and transparent price for services and many of the concerns driving fear-based arguments will prove unfounded.”

NB: An earlier version of this story said that PICA wants owners to be charged a fixed fee on top of their premiums. This is not the case and has now been corrected. PICA wants the insurers to pay set fees to strata managers.