“Extreme climate events such as the recent storms in the Western Cape and floods and fires in KwaZulu-Natal and the Western Cape over the past couple of years have resulted in insurance companies having to settle much bigger property-damage claims than expected and made it difficult for them to maintain acceptable loss ratios,” says Andrew Schaefer, managing director of property-management company Trafalgar.

“Due to increased insurance risks globally, it has also become more difficult and expensive for these companies to purchase re-insurance coverage. So most now have little choice but to substantially increase the premiums for ST schemes to pay and/or increase the excess amounts they will charge per claim.”

Insurance loss ratios are calculated by dividing the total amount paid out in claims by the total of premiums collected in a certain period, and in a ST scheme this ratio ideally needs to be between 35% and 55% for the insurance company to stay in business and meet certain conditions set by the Financial Sector Conduct Authority.

What this means is that for every R100,000 worth of premiums collected, the insurance company should be looking at only paying out a maximum of R55,000. “And in the past,” says Schaefer, “by far the majority of claims in ST schemes were geyser related, which made it relatively easy for insurers to work out the total claims amount they were likely to have to pay out per year, and the related rate at which the premium should be calculated.

Rising premium rates

“In most cases, that premium rate was 0,05% of the value insured, so that the annual insurance premium payable by an ST scheme insured for a replacement value of R100m, for example, was R50,000 a year.

“In recent years, however, insurance companies have had to pay out many millions more rand than they anticipated due to whole complexes being inundated by floods, lost in landslides and totally destroyed by fire. Due to the unreliability of the electricity grid, there have also been many more claims related to power failures and surges.

“So it isn’t really surprising that the premium rates we are being quoted now - as policies are renewed - range from 0,065% of the insured value right up to 1%, especially for those schemes in areas that are prone to extreme weather events.

“Thus the annual insurance premium payable by an ST scheme insured for R100m could literally double from R50,000 to R100,000 – which the owners will have to pay, as usual, via contributions built into their levies. These contributions are usually calculated according to each section’s participation quota (PQ).”

In addition, he notes, many ST insurance companies are increasing the excess amounts payable per “insured event” – and in terms of ST legislation, it is the individual section owner claiming from insurance that is responsible for paying the excess – not the body corporate as a whole.

“Consequently, it is more important than ever now for trustees to work with experienced insurance advisors who specialise in this type of policy and can assist them to negotiate rates and excess amounts in order to keep costs down for section owners while ensuring that the scheme is still fully insured.”

Schaefer says it is also essential for trustees to be aware of the dangers of over-insurance that can arise when an ST scheme loses value due to poor or delayed maintenance prior to an event such as a flood or fire. In such instances, the insurer would be entitled to pay out less than the sum insured, leaving owners to make up the shortfall if they wanted to replace the complex.

“The current situation also underlines the critical importance for ST schemes of having a 10-year maintenance, repair and replacement plan (as required by the Sectional Title Schemes Management Act), a big enough reserve fund to fund this plan, and trustees and managing agents who will ensure that the plan is actually implemented.

“Insurance companies are paying increasing attention to preventative maintenance and going forward, will be expecting evidence of annual roof and waterproofing maintenance, for example, in the form of tax invoices - and will most likely repudiate damage claims related to water ingress unless these can be produced.

“Even more seriously, we are seeing an increasing trend of insurers cancelling cover on 30 days’ notice for schemes that receive an adverse risk assessment due to lack of maintenance.”

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