“It’ll never happen” and “she’ll be right” were more than wishful thinking. But frequently ‘it’ can and does happen and the only thing holding financial ruin at bay is an insurance policy.
Landlord insurance. You know it’s necessary. But how often do you stop and consider how it works and what determines its cost?
In 2018, we settled more than 5,000 claims – with a total value in excess of $16.5 million. For the mathematically inclined, around $3,300 paid out per claim.
Of course, that’s an average and many claims were of lesser value while others were substantially more. And while many landlords would be able to ‘find’ the $1,175 one policyholder was paid to fix a broken window and other minor reparations, few could foot the $746,000 bill another landlord faced after a fire.
Owning an investment property comes with a unique set of risks – not only is there the risk the rental could be damaged due to fire, flood, storm or any number of other insured events, there are specific risks, like tenant-related damage (accidental, malicious and deliberate) and loss of rent, that also need to be factored in.
Last year alone, more than 1,300 (or 26 per cent) of paid claims were for tenant damage. This covered everything from wine spilled on carpets to homes having to be decontaminated.
A rental property is an investment from which the owner expects to derive an income. So, when a landlord suffers rental losses, it can have a devastating effect on their cash flow and personal finances – banks generally insist on mortgages being repaid, regardless of whether the landlord actually received any rent.
Almost 3,000 claims (or 58 per cent) for loss of rent were settled in 2018. Sometimes the result of bad tenant behaviour (absconding, rent default, breaking leases and denial of access), other times the non-payment was the result of circumstances beyond the control of tenant, landlord or agent – such as relationship breakdowns, domestic violence, job loss, serious illness, or tenant death.
While prudent landlords often factor in a few weeks each year when the property will not generate an income, unexpected damage or loss of rent frequently derails even the best plans. This is when the financial security blanket that is landlord insurance comes into its own.
Of course, it isn’t only damage and rental losses landlord insurance covers. There are a range of insured events for which cover is provided, along with the all-important matter of liability. The financial ramifications of a tenant or guest being injured or worse at the rental can be crippling. Society is becoming increasingly litigious and those injured as a result of an act or omission on behalf of the landlord are far less likely to ‘let it slide’ and instead sue for damages. Plaintiffs can be awarded eye-watering sums if they make a successful claim and without legal liability cover stretching into the millions, landlord or agent could face financial ruin.
Comprehensive landlord insurance policies provide cover for a range of insurable events – the obvious (like damage, loss of rent and liability) and also the less obvious. And it isn’t until a situation arises and the landlord needs to make a claim that having that cover proves to be a prudent investment. It’s those oft-overlooked policy inclusions in the PDS that can sometimes be invaluable. This includes cover for things like legal fees, costs to remove debris, fees incurred directly in relation to repairing or replacing the premises and extra costs of reinstatement necessary to meet the requirements of any statutory authority when doing so, or professional fees if you are subject to a tax audit.
At EBM RentCover we understand the property sector is constantly evolving and we ensure our landlord policies evolve along with the needs of policyholders. Over the years (and we’ve been providing landlord insurance for almost 30 of them!) we have introduced new policy types like RentCoverShortTerm which takes into consideration Airbnb landlords, added cover for pet damage and floods, and upped coverage for insured events.
We also have a commitment to our policyholders, ensuring best-practice claims handling (we introduced a new claims portal last year and still provide that personal touch by making sure there is an actual person available to assist with your claims, one who is both empathetic and empowered to make judgement calls), delivering personalised service and providing education. And we do this while ensuring our products are not only the most comprehensive and responsive to landlord needs on the market, but also competitively priced.
In order to maintain our standards and quality services – and to make sure there are funds available to pay claims – we occasionally need to review our premium pricing. Increasing premiums is not something we do as a matter of course (there’s no 1 April auto increase like there is for health insurance) and when we do find there is a need for a review, we keep any increase to an absolute minimum.
From 1 January 2019, a $10 premium increase for our RentCoverUltra, TenantCover and RentCoverShortTerm (contents only) policies came into effect. For policyholders with cover which includes a building component, there was also a small premium increase, with the actual increase dependent on postcode, building type, building age and the sum insured.
While no-one likes price increases, we strived to ensure it would be minimal while enabling us to continue to offer the service and support our clients have come to expect from us.
Pop quiz: How are landlord insurance premiums calculated?
Question: What do insurers use to calculate premiums? Is it:
- a crystal ball;
- comprehensive algorithms/mathematical calculations, statistics and probabilities, historical claims data and risk assessments;
- a dartboard and a blindfold; or
- all of the above?
Determining landlord insurance premiums is a highly complex endeavour taking into account many factors and using statistics and probabilities to determine the risk a particular property and owner poses. (Cast your mind back to Year 8 maths, anyone who didn’t glaze over may now be an insurance actuary – or a bookie!) The likelihood of claiming is analysed and a commercially viable fee determined for the insurer to assume those risks.
Basically it’s all about risk. And an insurer will set the premium to reflect the risks posed. When the risk of accident, loss, theft or catastrophe is higher, so too are the premiums.
Among the multitude of factors considered in determining landlord insurance premiums, some of the more common ones are:
- Property address
- Area (postcode) crime rate
- Natural disaster risk (e.g. cyclone, floods, bushfire)
- Type of insurance (building, contents or both)
- Policy type (how the property will be used e.g. fixed-term lease, corporate lease, holiday let, Airbnb etc.)
- Sum insured
- Type of building (and property size)
- Replacement costs (building and contents)
- Age and condition of the structure
- Construction material and other characteristics of the property
- Risk mitigation measures in place such as security
- Level of cover (including any optional extras)
- Excess payable
- Price of rent
- Number of rental properties
- Area claim history
- Personal and individual property claim history (previous claims and incident history)
- Discounts the policyholder may qualify for
Premiums are also impacted by other factors including:
- Changes in government taxes and any state or territory duties or levies
- New and updated data used to calculate premiums/changes in premium calculations
- Automatic adjustments to the sum insured
- Changes a policyholder makes that reduces their risk, such as installing security
- Value or quantity of what the policyholder is insuring changes
- The cost of claims the insurer (and underwriter) have paid to other customers and claims they expect to pay in the future
- Number of claims experienced in the landlord sector of the insurance industry
- Large-scale claims due to natural disasters such as floods and cyclones
- Regional or global changes that affect the price and availability of reinsurance
- Investment returns. Insurers invest premiums to help ensure they have sufficient capital to pay future claims. Poor investment returns may result in a premium increase
- Insurer’s cost of doing business
- Other commercial factors
At the end of the day, determining landlord insurance premiums is a complex exercise, but at RentCover we make sure our premiums are competitive and work hard to deliver reliable insurance solutions to give property managers, landlords and tenants the cover they need.
 The equivalent of about 3 long blacks in Sydney, 2.5 flat whites in Melbourne or less than 2 ice coffees in Perth!