The geyser has become one of the biggest challenges for insurers, underwriting managers and trustees wishing to manage their premiums. We are told that roughly 70% of all claims are geyser related – in other words, repairs, replacement and damage resulting from leaking or burst geysers.
So, how does this affect the owner? How does this affect the trustee?
A lot. An insurer, like any person in business, needs to make a profit. This means that a claim ratio of 60% is more or less the break-even point. Does this sound like gobbledygook? Let’s put it more simply. For every R100 of premium received, the insurer cannot afford to pay out more than R60 in claims on average. This is usually viewed over a historically averaged three-year period.
Take an average building of 30 apartments. The body corporate would normally pay about R2,000 per month on premiums, or R24,000 per annum. The average geyser costs about R6,000 to replace. Throw in a bit of resulting water damage, and the claim can rise to R10,000 or beyond. Three claims like this in a year (or R30,000 in claims versus R24,000 in premium income) equals a 125% claims ratio. What does this tell us? Well, it is simple mathematics. To achieve a 60% claims ratio, assuming the above scenario to be the trend, the insurer would have to double premiums. This answers the question: double the premium and everyone’s levy contribution goes up roughly R800 per annum each.
There is, of course, also the question of what constitutes a “burst geyser”.
“Bursting” can be defined as “to break or cause to break open or apart suddenly and noisily, especially from internal pressure; explode”. Let’s face it: geysers do not usually explode or burst. They corrode and eventually give in. Simple wear and tear and corrosion are sped up by lack of maintenance – this is the stark reality.
Lack of maintenance? How so?
In non-technical terms, geysers are manufactured out of steel and are glazed inside so that the steel and water do not meet and start the process of corrosion (or rusting). Geysers come off the factory assembly floor and are immediately transported about, to the retailer, in the plumber’s van, before they are finally installed. Along the way, the geyser is bumped and knocked. You can imagine all the glazing chips and imperfections by the time the geyser is finally installed. So, bearing this in mind, rust now starts forming where there is no protective glazed area. Geyser manufacturers thus also install a manganese rod called a “sacrificial anode”. This removable rod performs a specific job through a natural process of decay until it is shed or worn away. It may take 12 to 18 months until this anode needs replacement. The rod’s residue is transferred to the exposed chipped parts, effectively “coating the chips” and thereby preventing or minimising decay. Thus, if after 18 months there is nothing left of the anode, the geyser speeds up its internal decay process, and within 36 months or so, the decay causes serious malfunctions and a new geyser is required. This is what the experts tell me.
Does this sound like an insurable event?
Insurers have been paying these claims and have simply tried to “price it in”. If a plumber replaces a geyser and tells the insurer that it was a burst geyser, who can argue? An assessor, yes. But at what further cost? An extra R2,000?
Let’s take a look at what the rules say.
On one hand, rule 29 says, among other things, that the geyser must be insured to full replacement cost against bursting, subject to the trustees’ negotiation of excess premium and rate. On the other hand, rule 68 says that the owner is responsible for her geyser’s maintenance, even if it is located in the common area somewhere. So, the body corporate must insure the geyser against insurable events but the owner must maintain the geyser. There can be no arguing about that – provided that prescribed or standard rules apply.
Insurance policies are structured in different ways in an attempt to manage this high-risk area. Some policies work on a sliding scale basis – the older the geyser, the higher the excess. Others offer full geyser cover for a certain amount per month per geyser. Some offer a maintenance plan to take control of the unnecessary replacements that occur, and so on.
If trustees are concerned about non-burstings (in other words, unmaintained old geysers that cause much higher premiums and result in a watered-down insurance cover), the trustees can instead self-impose excesses. In other words, trustees can usually negotiate with the insurer for a lower rate where higher excesses are applied for geysers. A R4,000 excess on a geyser (where it may have been R1,000) may radically improve the claims ratio and lower the rate or premium achieved. This is where I would say that the trustees are acting in the best interest of all the owners, because they are negotiating the most appropriate terms and rates for the body corporate so that premiums remain reasonable and sustainable for all owners.
The ideal scenario is that owners work together and arrange for a plumber or a specialist service provider to change anodes and check geysers for faulty valves, for example, on a regular scheduled basis. By doing this, they are maintaining their geysers and reducing costs all round. This is the challenge.
Rules may need to be tweaked to allow them to be easily amended, so that the body corporate can take charge of geyser maintenance in certain circumstances. A complex with all geysers situated outside on common property can more easily be maintained by the body corporate, rather than when 30 owners must call in 30 different plumbers, especially when some owners may be away. Presently, the prescribed rules do not cater for this.
The way forward is going to be for legislators, together with input from the industry, to allow some flexibility in who can maintain the geyser. Meanwhile, trustees need to engage more with their brokers or insurance advisors about higher claims ratios and find the best alternative for all the owners, even if this means imposing higher excesses.
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Article reference: Volume 5, Issue 4, Page 2