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We are a block of 65 units in NSW and the insurance is around $35Kpa. A question was asked at our last AGM about who receives the trailing commission and was advised the Strata Manager does. When questioned why this was not passed onto OC the answer from the SM was if it was passed onto OC, Strata Management Fees would have to increase by a similar amount and that Insurance Companies do not pay commissions to Owners Corporations and if it did not go to SM it was retained by Insurance Company. Is this correct? Members of the SC were questioned if this was correct and responded that they trusted the advice given by the SM was correct.
You ask: “Insurance Companies do not pay commissions to Owners Corporations and if it did not go to SM it was retained by Insurance Company. Is this correct? ”
Technically I think that is correct. The insurance charged to the strata would be the same even if it arranged it itself. Our strata goes through an insurance broker and they get our trailing commission. We would pay the same price with or without the broker.
In my view what the strata should be looking at is what does SM charge otherwise for what they do. The trailing commission is money in the SM’s pocket. The strata should be looking at the other fees the SM gets and adding the trailing commission. If they believe that when added together the SM is over rewarded then the strata should (at the appropriate time eg when the SM’s contract is up for renewal) negotiate on the SM’s other charges/duties.
Our insurance broker adds an extra layer of security in case of the insurance company going under. Also the insurance broker does all our negotiation with the insurance company, this has resulted in us getting our payouts on two occasions when the insurance company were trying to deny payment.
As with anything is all about the overall value you get!
The information that you have received is correct. However, the Strata Manager must disclose this commission or face a penalty. Transparency is the key.
From the CHU website: “Commission payments are made to cover all of the administrative time and advocacy strata managers spend quoting and transacting an insurance contract for a scheme.”
“the commission also covers time spent on claims as, if a separate claims handling fee is set, this can become quite costly if unexpected claims lead to a high number of hours being worked.”
Both an estimated commission must be disclosed (at the AGM prior to the commission being paid) and the actual commission paid must be disclosed (at the following AGM).
“Strata managing agents must report at each Annual General Meeting whether any commissions or training services have been provided to, or paid for, by the agent in the preceding 12 months, and provide the particulars of those commissions or training services.
“The agent also has to set out an estimate of any commissions they expect to receive in the following 12 months. If an agent doesn’t do this, they are subject to a penalty of up to $2,000, so it’s an offence for an agent not to make this disclosure.”
See this link (from the Strata Mangers’ perspective):
and this link (from the OCs’ perspective):
This was a hotly debated issue before the last change to our strata laws.
The commission was about to be wiped until it was pointed out by some of the small “mum and dad” strata management companies that, without the commission, they would go under.
It’s not just a a case of them having a bad business model – the strata managers based in your local real estate office (for instance) service small local strata schemes in a way that the big companies can’t or won’t, for the simple reason that small schemes require almost as much work as large ones but the strata manager charges on a basis of a fee per unit per annum.
Some of the larger companies don’t take the commission or declare it as a contribution to reduced fees.
The insurers argue that having a middle person – a strata manager or an insurance broker – means they don’t have to “train” the strata committee every time they want to make a claim. That’s why if you negotiate the premium yourself, you don’t get the trailing commission refunded to you.
It sounds as dodgy as hell, but it kind of works.
I’m not sure we can talk about a trailing commission. A commission will be paid to the SM regardless of whether you renew with the same insurer or a different one, every year.
The origin of this commission was that the Strata Manager acted as an intermediary by facilitating the quoting and claims management. It allowed them to quote a lower “per lot” management fee to the scheme and appear more competitive, but it slowly became essential to their budgets. Most managing agreements stipulate that should insurance be sourced independently from the SM, the management fee will increase by an amount equivalent to the foregone insurance commission.
Since the new legislation, 3 quotes need to be sourced and most SMs rely on brokers to do the legwork for them. The broker charges a fee, but ALSO gets a commission from the insurer, that is then shared with the SM. The broker’s fee and SM commission have to be disclosed, but not the broker’s commission. The brokers usually only provide general advice which doesn’t require huge amounts of work and has limited value.
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