Insurance has traditionally been viewed as a way of protecting strata schemes from catastrophic financial loss. And it still does that.
But as premiums consume a growing share of strata scheme budgets, insurance is increasingly performing another important economic function. It is allocating capital. Money spent acquiring insurance protection cannot simultaneously be spent maintaining buildings, renewing infrastructure, accumulating reserves or improving assets.
Insurance therefore occupies an unusual position within the strata capital system. It protects capital against uncertain future losses by requiring the certain consumption of capital today.
That trade-off has always existed. What has changed is its scale.
This article applies GoStrata’s Capital Distortion Doctrine and the principle of Capital Conversion to examine what happens when insurance stops being merely a mechanism for protecting strata capital and becomes one of the forces determining where that capital goes.
[a 8:75 minute read, with 2400 words]
Strata insurance performs one of the most important capital functions in a strata scheme.
It protects owners against losses so large that the strata scheme might otherwise be unable to recover from them. Fire. Storm. Flood. Structural failure.
In return for a relatively predictable annual cost, owners transfer some of the risk of an unpredictable and potentially catastrophic capital loss.
That is what insurance is supposed to do. And it still does.
But something important happens when the price of that protection becomes large enough. Insurance starts changing what the strata scheme can afford to do with the rest of its capital. Across Australia, insurance has become one of the fastest-growing expenses faced by many strata schemes.
Premiums that once represented a relatively modest annual cost can now compete directly with maintenance budgets, capital works programs and owners’ capacity to fund the future of their strata schemes.
Insurance therefore occupies an increasingly unusual position in the strata capital system.
It protects strata capital against uncertain future losses. But it does so by consuming strata capital with certainty today.
That trade-off is not new. What has changed is its scale.
And, as that scale changes, so does the economic role of insurance within strata schemes.
The original economic purpose of insurance is remarkably simple.
Rather than every owner individually bearing the risk of a catastrophic event, many owners contribute relatively small amounts into a common pool. When a rare but significant insured loss occurs, that pool funds the recovery.
In strata schemes, insurance allows owners collectively to survive events that could otherwise be financially devastating.
Insurance therefore protects strata capital by transferring risk by allowing owners to plan for the future without needing to hold enough money themselves to respond to every conceivable catastrophe.
For decades, the relationship was relatively straightforward.
Insurance was an important strata expense. But it was rarely the defining expense.
And, its primary economic function was easy to see. It protected capital.
Increasingly, however, insurance performs another capital function as well. It consumes it.
Every strata scheme has finite financial resources. Every dollar allocated somewhere cannot simultaneously be allocated somewhere else.
That becomes important when insurance premiums rise significantly as the additional money must come from somewhere.
Sometimes it comes from higher levies.
Sometimes it comes from reduced maintenance.
Sometimes it comes from postponed capital works.
Sometimes it comes from reserves that might otherwise have accumulated.
Sometimes it produces special levies.
Often, the effects are spread across several of those places.
The important point is not simply that strata insurance has become expensive. It is that insurance increasingly competes with every other use of strata scheme capital.
The larger the insurance allocation becomes, the more consequential the choices surrounding everything else become.
Insurance is therefore no longer merely another operating expense. It is becoming one of the mechanisms determining how strata capital is allocated.
In earlier GoStrata articles, we explored an important principle.
Strata Capital does not simply disappear. It changes form.
That is the principle of Capital Conversion.
Capital may be transformed. It may be consumed. It may be transferred.
Orn an existing economic position may finally be recognised.
Insurance provides a particularly useful example of Capital Consumption.
A strata scheme takes financial capital and spends it acquiring protection against risk.
That expenditure may be rational. It may be prudent. It may be legally required. It may be essential.
But the strata capital is nevertheless consumed.
Once spent on insurance, it cannot simultaneously become repaired roofs, renewed waterproofing, upgraded services, accumulated reserves or improved buildings.
The economic value has not simply vanished. Cash capital has been converted into risk protection.
That matters because if strata participants perceive the transaction only as an “insurance expense”, they may not perceive what else has happened.
A capital allocation decision has been made as insurance has become another destination for strata capital.
That capital conversion has consequences extending well beyond accounting.
As insurance consumes more of the available financial capacity of a strata scheme, committees begin asking different questions.
Can we still afford the maintenance program?
Should we postpone the lift replacement?
Can we delay waterproofing another year?
Should we reduce the scope of planned works?
Do we increase levies again?
Can owners absorb another increase?
Notice what has happened.
Insurance is no longer simply protecting the consequences of strata governance decisions. It is shaping those decisions.
No insurer votes at the general meeting. No insurance premium has a seat on the strata committee. Yet the cost of insurance can determine which works proceed, which are deferred, how much owners are levied and how much financial capacity remains for everything else.
In that sense, insurance has become an invisible participant in the governance of the strata scheme.
Capital constraints become governance constraints.
And governance decisions then determine what happens to the building’s capital.
That interaction matters because Capital Distortion is not merely about money. It is about the structures through which economic reality becomes visible—or remains hidden—and how those perceptions influence decisions.
Strata insurance discussions usually focus on premiums.
Owners naturally ask whether premiums have increased by 20 per cent, 50 per cent or even 100 per cent.
Those figures matter. But they describe only the visible transaction.
The less visible question is: What did that additional insurance expenditure prevent the strata scheme from doing?
Economists call this opportunity cost.
Every financial allocation excludes another possible allocation. Every dollar spent in one place cannot simultaneously be spent somewhere else.
When insurance consumes an increasing share of annual strata scheme budgets, it reduces the resources available for other purposes.
The cost of strata insurance is therefore not simply the premium. It can also include the maintenance not undertaken.
The improvements deferred.
The reserves never accumulated.
The resilience never built.
And there is another distortion because those costs do not necessarily appear at the same time.
The increased insurance premium appears immediately in the strata scheme’s accounts. The consequences of the maintenance, renewal or reserve accumulation displaced by it may remain invisible for years.
A waterproofing project postponed today may not become a serious problem until years later.
An ageing asset not renewed may continue functioning until it suddenly does not.
A reserve not accumulated may remain invisible until the capital expenditure becomes unavoidable.
One allocation is recognised today. The consequences of the forgone allocation may emerge much later.
That timing difference makes the real capital trade-off particularly difficult for strata participants to see.
This creates another possibility within the strata system.
As insurance expenditure rises, less capital may remain available for preventive maintenance, renewal and risk reduction.
That does not necessarily mean those activities will be deferred. But the financial pressure makes that possibility more likely. And where maintenance or renewal is deferred, building risks can increase.
Those risks may, in turn, contribute to greater claims exposure or insurance pressure. Which may contribute to higher insurance expenditure. Which places still greater pressure on the capital available for other purposes.
The relationship is not inevitable. Nor does it mean that insurance causes building deterioration or that insurers are responsible for the condition of strata buildings.
The structural point is different - the mechanism protecting the building from financial risk and the mechanisms maintaining the physical condition of that building may be competing for the same finite capital.
Under some conditions, that can produce a reinforcing cycle:
That is not an insurance problem alone. It is a capital system problem.
Many owners still think of insurance as something sitting outside the strata scheme.
A necessary service purchased each year.
A premium paid to an insurer.
A policy sitting somewhere waiting for something bad to happen.
Increasingly, however, insurance sits inside the economic system of the strata scheme as it influences:
how much money remains in operating and capital works funds;
whether maintenance proceeds as planned;
whether capital projects are delayed;
whether special levies become necessary;
how much owners must contribute;
how affordable ownership becomes;
how attractive the building appears to future purchasers; and
ultimately, how the asset evolves over time.
Insurance is therefore no longer simply protecting strata capital. It is helping determine where that capital goes.
And the larger the insurance allocation becomes, the greater that influence becomes.
This is where GoStrata’s Capital Distortion Doctrine becomes important.
The distortion is not that insurance costs money. Nor is the distortion necessarily that premiums have become too high. Insurance has always required capital to acquire protection.
The distortion arises when strata participants perceive insurance primarily as a discrete operating expense protecting the building, while failing to perceive its growing role in determining the allocation of the scheme’s finite capital.
There are therefore two positions.
The strata scheme pays its insurance premium because insurance is a necessary expense that protects the building against future loss.
That is correct. But it is incomplete.
The strata scheme has allocated part of its finite capital to risk transfer.
That capital cannot simultaneously fund maintenance, renewal, reserves, improvements or other forms of risk reduction. As the amount allocated to insurance grows, the consequences for those competing capital purposes also grow.
The distortion does not arise because one position is true and the other false. It arises because one is highly visible while the other is much harder to see.
The actual economic role of insurance has expanded. The way strata participants perceive that role has not necessarily expanded with it.
That gap is important because strata schemes make decisions according to the economic reality they can perceive.
Much of the public discussion about strata insurance understandably focuses on price.
Are premiums too high?
Is there sufficient competition?
Are commissions affecting prices?
Are insurers properly pricing strata risk?
Should governments intervene?
Those are important questions.
And GoStrata will return to many of them.
But they come after a more fundamental question:
What happens when a financial mechanism designed to protect strata capital begins consuming an ever-larger share of the capital required to operate, maintain, repair and renew the same strata scheme?
That is not merely a strata insurance problem. It is a capital allocation problem.
Insurance still protects strata capital. But it does so by consuming some of that capital as the price of that protection grows; so too does its influence over every competing use of capital within the strata scheme.
At some point, strata insurance stops being merely a mechanism for managing risk and becomes a mechanism for allocating strata capital.
And when strata participants continue to see primarily the first function while the second increasingly shapes their buildings, Capital Distortion follows.
If insurance has become such an important allocator and consumer of strata capital, who and what incentives determine how strata insurance itself operates?
Because the insurance premium is not produced by the strata scheme alone. Behind it sits another system.
Insurers.
Brokers.
Strata managers.
Commissions and remuneration structures.
Risk assessment.
Disclosure.
Procurement processes.
Regulation.
And incentives.
If insurance increasingly determines where strata capital goes, then understanding the structures that determine insurance becomes part of understanding the strata capital system itself.
Future GoStrata articles will therefore move from the economics of insurance to the governance of insurance.
Not simply asking what insurance costs. But examining how those costs are created, allocated and influenced—and whether disclosure alone is capable of addressing the structural incentives operating behind them.
Because once insurance becomes one of the largest consumers of strata capital, the way that insurance system is designed becomes a capital question too.
And that takes us further into the analysis and mapping the strata system.
August 11, 2026
Francesco Andreone
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