Chapter News

Commissions under threat

REINSW is in consultation with the NSW Government over proposals to remove insurance commission.

Representatives from the REINSW Strata Management Chapter recently met with NSW Minister for Fair Trading Anthony Roberts and his Chief of Staff to discuss the Government’s proposal to remove insurance commission.

In discussions, the Minister raised the concern that insurance commissions inherently have a built-in incentive for managers to choose higher premiums.

The Strata Management Chapter summarised the Government’s key concerns as follows:
i) Strata managers should be free of what is termed ‘conflicted remuneration’; and;
ii) Transparency of remuneration arrangements need to be improved, including insurance-related services.

It would appear the Government’s hope is that through the banning of insurance commission, insurance premiums will drop by at least 20 per cent. This figure seems somewhat of a pipe dream when you consider that commission is currently paid on the net premium, which equates to the gross premium minus GST, fire services levy and stamp duty.

On a typical residential strata scheme, taxes make up about 46 per cent of the gross premium and the commission approximately 11 per cent of the gross premium. Therefore, the Government’s goal to reduce insurance premiums by 20 per cent does not appear to be viable through the removal of insurance commission.

Chapter concerns

The Strata Management Chapter is concerned that the removal of insurance commission could have severe ramifications for both consumers and the strata management industry.

The banning of insurance commission will lead to a short- to medium-term loss of income for strata managers, as many enter into three- to five-year management contracts. This cannot be changed in the anticipation of receipt of insurance commissions and the consequent increase in management fees to make up for the loss of income.

This necessary increase in fees will result in a move by many smaller strata schemes to self-management, which will likely cause a host of compliance problems to arise. The financial ramifications for strata managers would also be immense, both from a revenue and business value perspective.

“Insurance commissions have been around since strata schemes commenced, which was long before licensing was introduced in 1982, and have always been considered in the industry as part of the agreed overall management fee for strata management,” Strata Management Chapter Chair Gary Adamson pointed out .

“Banning the receipt of insurance commissions will necessitate an increase in base management fees if strata businesses are to remain viable,” he added.

Retiring generation

According to the Macquarie Relationship Banking’s 2011 Strata Best Practice Benchmarking Survey, two out every three strata management business owners plan to retire within the next three to five years. The value of these businesses will be decimated by the proposed banning of insurance commissions.

“Strata management company proprietors are no different to any other small business operator in that they predominantly look upon the value of their business as their retirement superannuation when they finally sell the business and retire,” Gary said.

Currently banks take into consideration insurance commissions when valuing businesses to finance or refinance a business purchase, so potentially some businesses could face foreclosure by the banks as their equity falls below the lending institution’s minimum lending criteria.

Another matter that has not been considered is that federal legislation precludes a third party (the strata manager) from dealing with insurance claims unless they are an authorised representative of the insurer.

If strata managers are banned from the receipt of insurance commissions they will no longer be authorised representatives, and as a result strata scheme owners will have to deal with their own claims.

It is clear that if the proposal eventuates, the ramifications for the strata management industry will be immense.

REINSW, in consultation with the Strata Management Chapter, will continue to lobby on this issue and the Journal will report any updates on the position of insurance commission.

This article was first published in the September 2013 edition of the REINSW Real Estate Journal.