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Insurance failures add $16k to cost of NSW flats

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It has not been widely reported, but Building Commissioner David Chandler has a big dream for apartments in the state – that one day commercial insurers will return to the fold and offer real and affordable cover for new high-rise construction.

However, that dream may have slipped further away recently with a report in the Sydney Morning Herald that compulsory insurance premiums for renovations and buildings three storeys and under are about to take their fifth hike in about years.

That would suggest that the chances of commercial insurers coming anywhere near construction cover for apartments of any size are as far away as ever.

According to the story by Matt O’Sullivan, builders insurance premiums for renovations will soar by up to 50 per cent from late July.

In January, the cost of construction insurance for low-rise apartments had already risen by 30 per cent in January.

Why? Largely because traditional insurance providers have been fleeing the market in the wake of outrage upon disgrace in the building industry.

This means that scandal-hit government insurer iCare remains the only home-building compensation provider in NSW. And that’s bad news all round.

According to the SMH story, the Independent Pricing and Regulatory Tribunal found in November that uncertainty about the risk of defects had discouraged other insurers, as iCare’s Home Building Compensation continued to chalk up losses each year.

As of December, the scheme had a deficit of more than $700 million to cover expected claims and costs, which will need to be funded by taxpayers.

The State Insurance Regulatory Authority, says the changes will bring premiums for most construction types to “sustainable” rates.

“This means, for the first time, premiums will cover the cost of the risk,” the authority says.

And that’s where the grit gets in the gears of David Chandler’s efforts to increase consumer and commercial insurers’ confidence in apartment buildings.

Insurers work on the basis of risk versus reward.  If their total income from premiums is larger than their total output in claims and costs, then they are doing good business for their shareholders.

If there is genuine competition for consumers, the premiums can be trimmed, to some extent.

But the Building Commissioner’s problem is that, to show he is making an impact, he has to expose the developers who are doing shoddy work. 

As a result, what the public, insurers and investors see is a steady stream of bad news stories (although in the long term they may well be good news).

According to the SMH story, the high cost of claims – averaging about $90,000 each – for the Home Building Compensation Fund was fuelling significantly higher premiums than other states.

Premiums in NSW for construction or of apartment buildings up to three storeys, or structural alterations to existing buildings, have roughly tripled since 2015. At present, the premiums add about $16,000 to the price of a new apartment.

The average premium in NSW is about 1 per cent of the value of a contract – about 20 per cent higher than Queensland and three times as high as Victoria.

There are other factors, of course, not least that for political reasons it has historically been much more difficult for owners corporations and bodies corporate to take legal action against developers in those states.

But the probability remains that in NSW developers, builders and their customers are suffering as a consequence of decades of incompetence, corruption and mistrust in the building industry which is only now starting to see systemic change.

The SMH story goes into the issues with building construction insurance in much greater detail HERE.

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