Generally, we all want insurance that offers the widest (most) cover for the lowest premium but there are a number of other important factors to consider, particularly in the sectional title environment.
Firstly, there is the matter of policy management. In the sectional title environment, claims ratios should not ordinarily exceed 60% over a rolling three-year period, otherwise the policy becomes unsustainable. 60% represents a breakeven point for community scheme insurers.
Ideally, the claims ratio should fall into the 35- 55% range. At such ratios, the insurer is comfortable and the body corporate’s premium and excess structures are correct. Under 35% there is space to negotiate better premium and over 55% the insurer should increase premium or increase excesses where applicable. This would be more accurate for a scheme of 30 units (or more) and where a trend of claims can be gauged.
We explain this to trustees in more detail and in an easy to read article.
Therefore, if a body corporate is already running above 60% claims ratio – and has been for the last few years – and a broker or insurer offers the body corporate an even lower premium, the body corporate could easily find itself heading for a much worse claims ratio. This would ultimately lead to increased premiums, higher excesses or terms placed on the policy, or a combination of all three. In the worst case scenario, the insured could be given notice by the insurer to terminate the policy. Thereafter, it will be difficult for the scheme to obtain cover from any insurer.
Another example is where a lower premium is obtained via a geyser call centre. Lower geyser premiums may be achieved because the insurer is replacing geysers at the lowest possible cost and with geysers of a lower spec. It might be better for the body corporate to rather initially pay a slightly higher premium to accommodate a stainless steel or copper geyser with a 10-year guarantee. This will depend on a scheme’s individual situation, e.g. size of geysers, frequency of claims, excess structure, trustee’s outlook, etc. After a proper analysis of the scheme’s need, this advice and the implementation of a well-suited replacement policy will likely result in fewer future claims along with an improved claims ratio with appropriately structured premiums and excesses.
Another pitfall is to strive for a lower premium, at all costs. It is natural that lower premiums can be achieved where excesses are very high. We have experienced trustees accept buildings cover with excesses stating “10% of claim, minimum R2,500” for all claims. Imagine a R10 million fire claim where the body corporate or a handful of owners are being saddled with a R1 million excess! Hardly sensible.
Then there are always new entrant insurers who try to disrupt the market by introducing leak detection or leaks cover. In our experience, their ‘benefits’ are included for a while until they incur losses, ultimately leading to such benefits being removed from cover after having a disastrous effect on claims ratios.
The best way forward is to work with a specialist broker who tests the market annually, who work with reputable and specialist underwriters, and who understand sectional title and its risks.
It’s pretty easy to better a premium that results in a higher excess but it is more important to establish a policy premium that is sustainable without any negative impact on all the owners in a scheme over the longer term.
Author: Mike Addison
Addsure is South Africa’s leading sectional title insurance brokerage. Obtain fit and proper advice from advisors who understand sectional title. Contact us our head office, Cape Town (021) 551 5069 who will put you directly in touch with one of our nationwide advisors.