Following the Grenfell tragedy, the cost of insuring multi-occupancy buildings (such as flats) has increased considerably. Earlier this year, the FCA was asked by the Secretary of State for Levelling-up, Housing and Communities to review, in consultation with the Competition and Markets Authority (CMA), the way the market for multi-occupancy buildings insurance operates. The aim was to understand what is driving year-on-year price increases and causing restrictions in coverage.
The FCA’s review assessed a range of both quantitative and qualitative data, including information from insurers and brokers active in the multi-occupancy insurance market, and a programme of engagement with relevant stakeholders in the market.
The FCA’s key findings:
• Supply of insurance for mid-rise and high-rise multi-occupancy residential buildings has contracted significantly – insurers in the market have limited or no appetite for writing new business, as a result of declining underwriting profitability of this line of business.
• Premium rates have doubled between 2016 and 2021 – average prices increased by 125% from 2016 to 2021 across the sample.
• Evidence of some high commission rates and poor practice which are not consistent with driving fair value to the customer – the FCA commented that ‘the level of some commissions in this market are an area of significant concern’.
• Concerns relating to quality of service, renewals and frictional costs.
• Lack of transparency and increased cost for leaseholders leading to significant distress.
• Competition is not working effectively for customers.
These are serious findings and the FCA has said that it will not hesitate to open up a market study if it does not see swift action and progress.
The FCA has set out the actions it will take and recommendations for others (such as government, the BIBA and the ABI). This includes:
• Creating a cross industry pool to limit the risk to individual insurers posed by certain buildings affected by flammable cladding or other material fire safety risks, aimed at reducing the price of insurance for these buildings.
• Increasing the amount and transparency of information available to leaseholders on the pricing of the insurance they are paying for.
• Making it easier for leaseholders to challenge high insurance costs passed on to them.
• Making leaseholders ‘customers’ of buildings insurance.
The FCA is asking for feedback on its proposals and will publish an update on progress in six months’ time.
What is the impact on mortgage intermediary firms?
Mortgage intermediary firms that arrange insurance for multi-occupancy buildings are reminded that they must not take action that undermines the fair value of products. Fair value means a price that has a reasonable relationship to the costs incurred (the cost to serve) by the firm and the benefits that the customer receives from the product. Firms must only offer customers products that meet their needs and must not be influenced to act against customers’ best interests by commission or other remuneration.
Where a broker’s remuneration increases (for example where the insurance premium increases and this increases the broker’s commission, as it is calculated on a percentage basis), firms should assess whether fair value is no longer being provided where there is no increase to the firm’s actual costs, or their contribution, level of involvement or the benefit added by them as a distributor of the product.
Some brokers may rebate some of their commission to the freeholder or property manager. Firms should review such arrangements to ensure the commission paid is a genuine reflection of additional work done by the freeholder or property manager for the benefit of leaseholders. The FCA is concerned that if the freeholder or the property managing agent is also receiving remuneration from the insurance policy, e.g. a share of the commission paid to the broker, this could influence their decision over which policy to select and conflict with their duties to their leaseholders. The FCA is concerned that conflicts of interests are not being managed appropriately by regulated firms.
The FCA is to undertake a review of brokers who charge the highest commissions and will publish its findings.
Will mortgage customers in multi-occupancy buildings (such as flats) see a reduction in their insurance premiums?
It seems it is too early for the FCA to tell, as it was unable to form a clear view on the pricing of multioccupancy buildings insurance post-remediation due to the very small number of buildings in its sample that insurers identified as having completed remediation works. However, the concept of risk pooling is likely to have a greater impact in reducing prices than other remedies.
AMI will continue to monitor developments in this area.
