I recently wrote about the incredibly difficult challenges facing many leaseholders living in buildings with combustible cladding and we know the cost of insurance is only one of those challenges. I received lots of questions and feedback on what I’d written – most of it critical – but we want to continue to engage on the issues so I’d like to set out here our response to five key themes that were raised. You may not agree with what I’m saying but I hope it goes some way to at least explaining the perspective of those insurers being asked to take on the financial risk associated with insuring these buildings.
Buildings insurance was cheaper previously even though the dangerous cladding has always been in place
Historically, insurers of high-rise buildings would have only had to prepare for a loss caused by damage to just a few flats within a building. That is because the design and construction of that building, with the right materials and fire safety provisions in place, should have limited the spread of fire and allowed the damage to be contained – or at least make this an extremely low risk. Sadly, we now know that many buildings have been designed, built and signed off in a regulatory system that an independent Government review has found was unfit for purpose. A mix of combustible cladding and missing or inadequate fire barriers (all of which are essential to limiting the spread of fire in high rise buildings) means insurers lack confidence in some of the decisions that have been made about the fire safety of buildings.
The reality is that today, insuring a ten-storey building of 60 flats, is a very different proposition when the maximum loss could well be the whole building. Insurers therefore have to work on the basis that the costs of fire in these buildings are significantly higher than originally thought and that some of them are an ongoing fire risk.
A public/private partnership could be established to help leaseholders with the costs of insurance premiums
In my earlier blog, I set out why we don’t believe that the idea of ‘Cladding Re’ is an appropriate solution, namely that establishing a public / private reinsurance scheme is a complex and lengthy process requiring primary legislation and regulatory authorisation. Leaseholders cannot wait that long. However, the notion of risk sharing between the public and private sector is something that could be considered – as it has been in other circumstances before. Last year, a trade credit reinsurance scheme was agreed between the industry and UK Government to ensure insurance coverage and credit limits are maintained for businesses during the pandemic. More recently, a limited indemnity scheme was agreed with the UK Government to support care homes in England looking after Covid positive patients. There are lessons to learn from the development of each of these time-limited interventions and it would be a decision for the UK Government as to whether this is something they wish to explore further. What is clear though, is that any consideration of such a scheme must sit alongside a commitment to have the buildings made safe as soon as possible.
There is a view that insurers are exploiting vulnerable people and profiteering by significantly increasing premiums
There is no evidence for the ‘profiteering’ jibe and given the efforts insurers have made to provide ongoing coverage to high-risk buildings since the Grenfell fire tragedy, such occasional claims feel in poor taste.
Firstly, the cost of a premium – for any insurance product – is primarily driven by risk and, for the reasons set out earlier, a number of the buildings that we’re discussing are dangerous and present a higher insurance risk.
Secondly, insurance is a highly regulated industry where firms not only have to hold enough money to be able to pay out on a claim, they have to hold significant additional amounts in reserves on top. That means for every building with combustible cladding that an insurer has on its books, millions of pounds need to be put aside in case anything should happen. With more and more risky buildings being discovered and more and more issues beyond cladding causing concern, this has become a significantly more costly exercise. It is not surprising therefore that highly-regulated insurers have to manage their finances accordingly.
Thirdly, it’s worth remembering that 12% of every insurance premium is Insurance Premium Tax (IPT) meaning that 12% of the premium being paid is going to the Treasury. This has been doubled by the UK Government since 2014.
Establishing a waking watch or installing a fire alarm might not be reflected in the insurance premium
The ultimate solution to reducing the fire risk of high-rise residential buildings with combustible cladding is to fix them – waking watches were only ever designed as a temporary measure pending remediation. The main purpose of a waking watch or fire alarm is to save lives, not save buildings, alerting residents to evacuate and notifying the emergency services of an incident as quickly as possible. Each building will be different, and residents will be in the hands of the fire service or the responsible person for the building as to which measures they’re required to install.
But fire safety is also about saving peoples’ homes and ensuring as little damage as possible occurs should the worst happen. And the worst does happen, buildings insurance is there to cover the costs of repairing or rebuilding a property. While waking watches are a tool to assist evacuation and save lives, they are not a solution for preventing costly damage to the building. The addition of sprinklers to a building is one fire safety measure that might have an impact on an insurer’s risk perspective, but sadly it generally remains the case that buildings with combustible cladding are a higher risk and the premium will continue to reflect that.
The Building Safety Fund will only help leaseholders living in buildings that are over 18m high
We’re acutely aware that some leaseholders are under additional strain as the Government’s Building Safety Fund does not apply to their building, and so the challenge of paying their insurance premium is even greater whilst they’re also facing the costs of remediation work. As I said last week, no insurer wants to put their customers in this situation. We are on the side of leaseholders in calling on the Government to help fix all buildings with combustible cladding as soon as possible and we have been calling for overall reforms to make our buildings safer from the risks of fire since well before the Grenfell Tower tragedy. The Prime Minister said last week that the Chancellor of the Exchequer and Communities Secretary will soon be coming forward with a full package of measures to address the issues. We look forward to hearing more and hope that 2021 is the year that significantly more buildings start being remediated and that a new regulatory framework is put in place in which everyone can be confident results in safer buildings.