What is the FCA’s review of insurance for multi-occupancy buildings?
In January 2022 former housing secretary Michael Gove suggested the insurance market was "failing" some leaseholders living in blocks of flats due to premiums "rapidly escalating" following the Grenfell Tower tragedy. Gove said despite progress to remove dangerous cladding, premiums had "increased dramatically," leading him to instruct an FCA insurance review.1
This review has sought to understand the underlying causes of year-on-year price increases and the marked restriction in coverage available for multiple-occupancy buildings. It also aimed to make practical recommendations for measures that industry, government and regulators could take to make cover more affordable and widely available.
What were the FCA’s findings on the insurance market for multi-occupancy buildings?
The FCA found some insurers have left the market, while others had a reduced appetite to take on new business, apparently driven by falling profitability.
Due to the limited number of firms prepared to underwrite buildings exposed to flammable cladding risks, there is limited commercial incentive to supply this insurance, reducing the pressure on insurers to lower prices. The review found premiums for the buildings in the FCA’s analysed sample had increased by 125% between 2016 and 2021.2
The FCA also detailed concerns around quality of service, renewals and frictional costs, noting that even where there were alternative insurance providers available, costs of switching can sometimes limit how far freeholders and property managing agents are willing to move away from their incumbent insurer.
More generally, the FCA found a lack of transparency and shortcomings in the availability, accuracy and quality of data consistently recorded by insurers and brokers. This, plus increased costs are leading to significant distress for many leaseholders, the FCA says.
What did the FCA insurance market review reveal about commission on multi-occupancy buildings insurance?
261% Between 2016 and 2021, the value of commissions for brokers more than tripled
While the commission rates paid by insurers to brokers varies significantly, it is typically at least 30%, according to the FCA’s review. The regulator also found the mean absolute value of commissions more than tripled for brokers between 2016 and 2021, representing a 261% increase, and more than doubled for freeholders/property managing agents, representing a 137% increase.
The regulator also noted how leaseholders had no role in the process beyond paying the costs.
In this context, the FCA noted the significant potential for unmanaged conflicts of interest where freeholders or property managing agents make choices potentially driven by their own interests, including levels of earnings.
The FCA also said it shared leaseholder concerns about remuneration and the potential for secret or hidden commission and profits, particularly where there is no transparency.
What are the FCA’s recommendations to address issues with multi-occupancy buildings insurance?
The package of recommendations and other potential remedies suggested by the FCA includes:
How can parties demonstrate they are providing good value where they take commission?
Some property owners are adding value when it comes to organising buildings insurance and accepting an appropriate and proportionate level of commission in return. This may be the case particularly amongst property owners that retain their own insurance departments, which are often focused on getting good outcomes for their leaseholders.
We suggest it’s increasingly important to document such efforts, for example, evidencing the processes around portraying risks constructively and persuasively to insurers.
Property owners should also be ready to demonstrate their rationale around not opting for the cheapest cover, perhaps on the grounds of weak security ratings of a cheaper provider.
Property owners and their brokers may also want to consider benchmarking exercises to compare how far their current premiums and remuneration are within typical thresholds against contemporaries, seeking to understand what’s driving higher levels of commissions where required.
In light of the FCA review, WTW recommends embracing transparency and getting on the front foot with leaseholders, being upfront around commission disclosures so they can clearly see which parties take what remuneration and what exactly this pays for.
This may ultimately work to neutralise potential reputation management issues at source and also supports property owners in being viewed as good landlords with both current and prospective tenants.
The landscape for multi-occupancy buildings insurance is changing rapidly. In the near future, it’s possible that leaseholders, the end customer of the buildings policy, could be treated as a customer from a compliance point of view, so it may be worth considering best practice around disclosures in this context. If you need support evidencing your approach to multi-occupancy buildings insurance and commission, or understanding the fast-moving market, get in touch.
