Press statement in response to FCA Report on insurance for multi-occupancy buildings

BIBA welcomes the FCA report and broadly supports the key recommendations made. BIBA appreciated the comprehensive engagement by the FCA with our members over the last few months in gathering information to help write the report and listening to their views.

We are pleased that the FCA supports the idea of an industry pool to insure the most difficult risks pending remediation. It is these risks that have witnessed the most acute premium increases, especially where they do not form part of a wider portfolio of risks. We have been working on solutions in this space for over a year and are now working closely with the ABI on options, drawing on the skills of professional reinsurance brokers to build the required capacity.

The second recommendation in the FCA report calls for greater transparency and better disclosure for leaseholders with regards to the insurance placement. BIBA fully supports this recommendation. We consulted with our members earlier in the summer and agreed that we would encourage freeholders and property managing agents to present clear information to leaseholders about the insurance related work they undertake, the value they add to the supply chain and their contributions to the cost of the insurance placement.

The third recommendation discusses the idea of amending FCA rules so that leaseholders can be treated as customers. We understand the FCA’s thinking here because it will force hard disclosure of earnings by all freeholders and managing agents. We think this may be a positive step on the face of it and could lead to greater transparency in certain areas of the market, albeit this may require legislative changes to insurance law and the concept of insurable interest. This may create an opportunity for freeholders and property managing agents to present information to leaseholders about the insurance related work they undertake, the value they add to the supply chain and their contributions to the cost of the insurance placement. Currently insurance brokers have a primary duty of care to serve the interests of their customer (the freeholder) but have always strived to think about the person (the leaseholder) who pays the premium when placing the risk. This is evidenced in the very wide policy wordings developed by specialist brokers in this sector which ultimately bring specific benefits for leaseholders, such as generous alternative accommodation limits. The leaseholder does not make the buying decision and is therefore not necessarily currently considered the customer in the normal sense within the FCA rules.

We do think that a better approach would be to treat leaseholders as ‘partial beneficiaries’ to the insurance contract under existing FCA rules and supplement this with the disclosure and transparency requirements outlined in their second recommendation.

The fourth recommendation in the report addresses remuneration practices and commission levels in this sector. The data in the FCA report clearly shows that broker commission rates have been steadily falling in this area. On the whole, the market for multi-occupancy buildings works well, even if the number of insurers has reduced. We note the mean commission rate for cladded buildings retained by the broker dropped by 6 points from 19% to 13%

Our members who specialise in real estate have told us that they have deliberately negotiated their commission rates downwards, especially where blocks have seen excessive premium increases because of cladding problems, even though their costs incurred in placing such risks have risen significantly. It should also be noted that as premiums reduce in the soft market, commissions and total earnings will equally reduce when the level of work remains the same.

The FCA also raises the practice whereby commissions are shared by brokers with property managing agents and freeholders in recognition for work they perform relative to the insurance placement. We think that preventing this practice could bring unintended consequences. For example, if property managing agents cannot continue to be remunerated through rebated commission, then it is possible that either the service charge to leaseholders may increase as managing agents/freeholders look to their only other source of income or being nothing more than a cost burden to them, they may lose interest in their involvement in the insurance arrangements of the properties. This could result in insurers not getting the answers they need, and premiums being affected because of a perceived deterioration in risk.

We think that current FCA rules around ensuring fair value of all insurance products are sufficient. Ensuring that fair value is delivered is an established FCA rule that is respected by our members. In anticipation of the FCA’s report, we have already consulted with our leading property brokers and many of them have already agreed to supporting the following statement.

“We are aware that some insurance intermediaries have historically agreed to rebate partial commissions to property managing agents and freeholders to remunerate them for their work in managing the insurance arrangements for multi-occupancy properties. We have become aware that the FCA has concerns with unregulated parties receiving remuneration.

BIBA understands the FCA’s thinking behind its view and is recommending that members continue to review remuneration arrangements for compliance with the FCA’s relevant requirements. This includes assessing the work undertaken by all parties in the insurance distribution chain, to ensure that they provide fair value and reasonably reflect the costs incurred or the benefits provided. This complements the work brokers do to ensure that customers are offered products that meet their needs, acting in the customers’ best interests.

We understand that the major property insurance brokers have already individually reviewed and taken steps where needed to change their remuneration practices.

BIBA is committed to helping make buildings insurance that affects leaseholders more affordable and will continue to work with the FCA and stakeholders to help achieve this.”

The fifth recommendation – working with the FCA and insurers to improve the granularity of risk data captured – is welcomed.

The final recommendation notes a lack of appropriately qualified surveyors and fire safety experts having delayed insurers’ efforts to better understand the risks posed by multi-occupancy buildings. We think the problem is wider and more nuanced – a lack of qualified surveyors and fire engineers has slowed the identification of problem buildings and delayed the pace of remediation. A primary reason for the lack of qualified firms and individuals in this area is in turn explained by an acute lack of adequate professional indemnity (PI) insurance.

Over the past two and a half years, BIBA has submitted several papers to Government focussed primarily on solving the lack of adequate PI insurance to enable professionals to undertake remediation work in High Rise Residential Buildings. Post the Grenfell tragedy and as the scale of the problem became apparent, so insurers have sought to limit their exposure through the application of broad exclusions when it comes to fire safety and fire engineering work. The lack of PI has therefore acted as a brake on the pace of remediation. We have worked very closely with DLUHC on an initiative to provide a government-backed insurance scheme for professionals undertaking EWS1 work. One of our members was retained by DLUHC to design this scheme which should launch this month. This scheme should enable a backlog of EWS1 work to be cleared, thus helping free up the valuation market for leaseholders looking to sell or re-mortgage their properties. Our 2022 Manifesto calls on Government to broaden this intervention so that professionals then retained to redesign, remediate and install new exterior wall systems can have access to the PI they need. As noted above, once a building is made safe, then we expect the cost of buildings insurance to fall back to a more normal level. Section 1.2 of our Manifesto is dedicated to the issues presented by cladded buildings which underlines our commitment to solving some very complex issues and hopefully making the lives of those affected a little bit easier.