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Insurance Commissions:

Wednesday, 28th August 2013

A big topic at the moment around the corridors of the strata industry is insurance commissions and how they affect you – the lot owner. We have asked the biggest underwriting insurance agency CHU Underwriting to explain it to you.

IntroductionThe NSW Government is considering imposing a prohibition on Strata Manager (and only Strata Managers) from receiving commissions for insurance - related activities for strata schemes.  Such a move will remove choice and cost owners more.  In this article, we would like to debunk a few myths that are circulating the industry and have been put forward in support of such a ban.BackgroundWhy do insurance companies pay insurance intermediaries such as insurance brokers or agents (e.g. strata managers) a commission?Insurance companies traditionally employed large teams of sales and distribution staff to go out and sell their insurance offering.  Over time, Insurers recognised that Insurance Brokers and Agents had better relationships with their clients, understood the risks well, and having them sell the insurer's offerings and paying them a commission was far cheaper than employing teams of staff.Most administrative functions could be taken care of as well.  So this form of distribution still dominates most product lines apart from basic household insurances where the internet (direct sales) is increasing in popularity for domestic purchases.What does a commission payment cover?All advocacy and administrative time in quoting, transacting and servicing an insurance contract for a scheme.  For most schemes, the commission also covers time spent on claims which - if otherwise set as  a Schedule B fee - based arrangement - can be very costly due to the many hours of work performed in managing unexpected claims. The Agent or Broker only gets paid if the contract completes, so there can be a lot of time given to quoting and preparing an insurance contract for a scheme for no reward.  For most small to medium sized schemes, receiving the insurance services of an Agent or Broker is extremely attractive, because there is no separate cost imposed, with the insurer only paying the commission to the successful Agent or Broker.  There is no additional cost to budget for.What else should I know about what this commission payment can cover?

  • Training - Under financial services laws, in order to provide financial services (providing advice and arranging or otherwise dealing in insurances) Strata Managers need to be trained and then appointed as a representative (distributor or authorised representative) by an Australian Financial Services (AFS) Licensee.  The Owners Corporation is the beneficiary of the knowledge gained through the process.
  • Supervision - Once appointed, and depending on the level of authorisation, Strata Managers are the subject to ongoing training, monitoring and supervision (including audits).  This provides a direct benefit to Owners Corporations because the AFS Licensee cannot abrogate responsibility through this mechanism.
  • Insurance - AFS Licensees must provide professional indemnity (PI) insurance protection for the activities of Strata Managers they have appointed as representatives where they are acting within the authority provided by the Licensee.  This provides a direct consumer protection benefit to Owners Corporations through having the AFS Licensee business and assets standing behind the Strata Manager in the event of any acts, errors or omissions.
  • Advocacy - Strata Managers have a fiduciary responsibility to owners, so they need to give general advice to effectively meet owners' expectations.  They can only do this if they are trained and properly appointed in accordance with legal requirements.  Importantly, in times of adversity, they need to collaborate with many insurance representatives.
  • Data & Transactions - Strata Managers need to collect, hold and present the data of a building to insurance markets, whether via a Broker, or direct to Insurers or specialist Underwriting Agencies.  These activities include:- Maintaining risk data and claims histories to negotiate best options;- Maintaining a schedule of business activities for commercial premises;- Organising/Updating insurance valuations;- Completion and lodgement of documentation;- Collection and payment of premiums;- Receipt of certificates;- Assistance with obtaining certificates of currency;- Coordination of repairs and administrative activities in the event of a claim.
  • Repairs - Strata Managers will perform work when damaged common property needs repair.  The cause of damage is not always obvious, and any issues around causation - i.e. accidental damage (covered by insurance) or maintenance-related (a scheme cost) are generally sorted out after all the work has been completed. The Strata Manager is in the best position to quickly act on such matters, which is efficient and cost effective for owners.

You can read this full story including all the myths and facts on pages 38-43 in the Spring edition of StrataLive magazine at http://www.stratalive.com.au/stratalive-magazine-spring-2013

 

 

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