Does Every Strata Management Company Take Insurance Commissions?

• Strata Management / Owners Corporation Insurance

• The Concerns of Owners Corporations and Committees

• Why Do Strata Management Companies Receive Insurance Commissions?

• Unscrupulous and Unethical Body Corporate Managers Taking Too Much Insurance Commission…

• What Percentage of Strata Management Companies Take Insurance Commissions?

Strata Management / Owners Corporation Insurance

We had a very interesting (and long) conversation with Greg. Greg has a townhouse in Toorak, in an owners corporation of 3 lots. He looks after the owners corporation as the ‘self-manager’. He takes care of organising maintenance and repairs, he sorts out the sharing of costs, and he renews the building’s strata insurance.

He called us as he wanted our help in appointing a professional, competent, and honest owners corporation manager to look after 3 townhouses. Greg had been diligently ‘running the body corporate’ for a number of years and could no longer do it due to other commitments.

The other very important thing that Greg wanted from us was a strata manager / strata management company who WOULDN’T take an insurance commission on the building’s residential strata policy.

Greg also own another property that is managed by a strata manager who belongs to a large franchise group. That owners corporation / building was also another smaller complex and he said that every year the strata manager there receives ~$600 in insurance commissions. I said that it’s a fairly common industry practice and generally it covers the managers when they have to lodge claims etc.

Greg wasn’t having a bar of it – he pointed out that they hadn’t any insurance claims in the last few years and the manager (from the franchise group) didn’t do a whole lot.

So, some valid points there, so let’s open the can of worms…

The Concerns of Owners Corporations and Committees

Greg was retired and a bit of an old-timer – he had seen it all.

He laid out some very good points with regards to strata managers / strata management companies receiving insurance commissions:

1. What is the reason that insurance commission?
2. What work do they do to warrant being compensated by the insurance policy?
3. Wouldn’t they (the owners corporation and the owners) pay a higher insurance premium because of the insurance commission?
4. How does the owners corporation know that they’re getting the best policy and coverage for their building?
5. Is there a financial incentive for the strata manager / strata management to drive the insurance premium up in order to receive a bigger insurance commission?

Why Do Strata Management Companies Receive Insurance Commissions?

Firstly it’s important to understand that strata managers / strata management companies are generally the Authorised Representative of the Insurance Company / Insurance Broker.

Parties selling insurance in Australia have to hold an Australian Financial Services Licence (AFSL).

So, there are some sound reasons as to why managers receive insurance commissions:

1. They’re able to speak to the policy when they’re the authorised rep; and
2. It acts as compensation for the managers lodging and managing insurance claims.

The other factor for Committees and owners corporations is that the strata insurance:

1. Subsidises the management fees that the owners corporation would otherwise have to pay as it forms part of the managers’ top line revenue; and
2. Without the insurance commission going to the manager doesn’t necessarily equate to savings to the owners corporations as the argument has been that the insurance companies would have to hire more staff to manage claims.

How Much Insurance Commission Do Strata Managers Receive?

It varies – depending on the strata manager / strata management company, the insurance company / broker, and the owners corporation itself. The insurance commission can be anywhere from 10 to 20%.

Our recommendation to Committees of large buildings / owners corporations is to agree a fixed fee with strata management company rather than a percentage as:

1. A percentage for such a large insurance premium may not necessarily be commensurate with the insurance work that the strata manager will do; and
2. A fixed-fee removes the financial incentive for the manager to put in place an insurance policy that is more expensive than what is needed.

Unscrupulous and Unethical Body Corporate Managers Taking Too Much Insurance Commission…

Body corporate managers typically make this disclosure in their management contracts:

However, that doesn’t mean that all body corporate / owners corporation managers out there are playing by the rules… We’ve seen many owners corporation being taken advantage of:

The best advice for Committees and Owners Corporations here is to always review and compare your financial statements:

• What is your current year’s insurance premium? How does it compare to the insurance premium in the prior years?
• What is driving the increase in the insurance premium? Is it to do with insurance claims, a re-valuation, or some drivers?

Sometimes there can be genuine reasons for insurance premium increases. Sometimes there are other factors at play:

What Percentage of Management Companies Take Insurance Commissions?

In our estimation (it’s hard to say with absolute certainty) of all the strata management companies and strata management contracts that we’ve come across it would be probably be in the range of 70-85%.

So not all strata management companies have this practice. We work with 5-6 companies who don’t but more importantly the ones that do receive insurance commissions go about in the right way.

Hopefully, we’ll be able to help Greg out and give him some strata management options for him to scrutinise.

Strata Managers Not Only Place Your Insurance, They Also Look After Your Money

Due diligence and choosing carefully is important – have a read of this article for one example of where things didn’t go right – Don’t Trust a One-man Band with Your Money (or Owners Corporation Management).

Lastly, Strata Management Consultants specialises in not only advising and guiding Committees on how to change body corporate management companies but have also carefully vetted every management company we work with. Find out more about the value of having a Strata Consultant working for you here, or feel free to get in touch on 1300 917 848 or via email at office@strataconsultants.com.au.

Does Every Strata Management Company Take Insurance Commissions in Victoria? – Content Copyrighted 2020 by Strata Management Consultants