Meeting sectional title insurance challenges in 2018

The beginning of a new year is a good time to take stock of our risks and finances, getting our houses in order financially.

It is important that trustees understand the sectional title insurance environment before informed decisions, planning and action can be taken.

The large fires, storms, dramatic weather as well as increased damage to property through civil unrest have increased over the past year or so, for example, damage to university property, bus strikes, the Western Cape storm, KZN storms, Knysna fires, Hailstorms and flooding in Gauteng, to name a few.

Addsure looks after and provides nearly 2,000 larger property policies around South Africa, covering over 40,000 individual unit owners in community schemes. Drawing from our fair pool of risk, we look at some statistics and experiences over the past year to share some of our conclusions and expectations for the year ahead.

Claims ratio

Claims ratio is a key indicator, i.e. the ratio of premiums received by the insurer versus claims paid by the insurer.  In the community scheme environment, insurers aim to insure risk with the lowest claims ratio, expecting premiums to deliver them a claims ratio of somewhere between 35% and 55%. Unfortunately, the trend has been for average ratios to be on average between 55% and just over 100%. Besides the ever-bothersome geyser-related costs, the larger episodes last year have taken their toll. This means that community schemes have enjoyed low premiums if one considers the risks up to now.

What does this mean to trustees?

Trustees need to be aware that most of the insurers will be looking for increased premiums and will seek to manage their risks a bit more scientifically to steer ratios to more sustainable levels. In other words, premiums will increase and where claim ratios are particularly high, even higher increases and higher excesses can be expected.

Receiving good advice now become paramount. Comparative quotes must be thoroughly analysed upon annual renewal of the policy for the most appropriate cover to be selected. Mid-term adjustments (premium increase and terms) on particularly high cost policies (those with very high incidents of claims) are almost a certainty.

Positive changes over the longer term

Recent community scheme rules and regulations have added an additional short-term financial burden to schemes. Schemes now need to budget for a ten-year maintenance plan and reserves. In some cases, this may also result in the need to acquire additional (compulsory) fidelity cover. Among these changes is the compulsory requirement to have the properties valued at least once every three years.

In our opinion, these are really positive changes that should result in lower costs over the longer term. Maintenance planning and reserves mean that properties will be better maintained and should result in a lower incidence of wear and tear-related claims.  Roof maintenance and planned repairs around common property come to mind.

Regular valuations will decrease the risk of average being applied (paying out much less than the claim value due to underinsurance) or that a property is overinsured. For example, building inflation over the past two years has averaged at 5% per annum, but most policies have been renewed at the default 10% per annum. In many cases, having a valuation done now will likely result in some premium savings.

Technological solutions

Exciting technologies are now on offer to schemes through their managing agents. Maintenance experts offer electronic ways of planning and maintenance with electronic devices communicating faults and problems as they occur, for example, water meters can be programmed to shut off and monitor losses and problem areas. Cloud-based management software allows managing agents and owners to communicate, deal with issues swiftly and more efficiently. Problems dealt with as they occur and preventative measures taken can reduce overall risk.

Addsure offers managing agents around-the-clock access to claim management with live monitoring of claims. Better risk and financial management is becoming the norm; it is no longer a luxury that only larger schemes or management companies can afford.

Yes, there are challenges, but these can certainly be met with better planning and making use of improved technology. Good insurance advice for the year ahead will be important.