Throughout the work that we have been undertaking on the building safety crisis, we have tried to communicate openly and clearly with leaseholders. We recognise the financial and emotional strain they are carrying and we are on their side in wanting to drive urgent progress. In that spirit, I want to provide an update on an important milestone we’ve reached as part of our concerted efforts to reduce costs for leaseholders, in which we include owners in Scotland, living in multi-occupancy buildings with combustible cladding and other fire risk issues.
In September, the Financial Conduct Authority (FCA) published its report on insurance for multi-occupancy buildings. It contained a recommendation for the ABI to develop a risk pooling scheme and a plan for how it could be implemented. We have met that recommendation. Long before the FCA’s report was published, we had been working closely with our members to develop potential options that could help reduce insurance costs for buildings affected by fire risk issues. Further work has been undertaken to consider a number of different alternatives – some purely commercial, some which could involve Government backing – and identified a plan which, we believe, could help those leaseholders facing the highest premium increases.
As those familiar with the topic will have heard me explain before, insurance is a business based on pricing risk. The greater the risk posed by a building, the greater the insurance costs. Where those costs are potentially significant, insurers will take out their own insurance – known as reinsurance - to provide financial back up if a major event results in high claims costs. It is these firms, reinsurers, who could hold the key to an issue identified in the FCA’s report.
A significant driver of high costs for leaseholders was found by the FCA to be “excess layers” of insurance. This is where different layers of risk are placed with multiple insurers because one insurer alone would be taking on too much risk, meaning the insurance is likely to be more expensive. The premise of the plan we’ve submitted to the FCA is based on one insurer sharing all risks with a group of reinsurers instead. It would mean that one insurer is more likely to be able to provide cover for the whole building, including in the worst-case scenario of a catastrophic fire. In turn, the need for “excess layers” would be reduced which would reduce the overall cost of the insurance. The scheme is being developed by specialist reinsurance broker McGill and Partners, and I’d like to thank the team at McGill for all their work with us over many months.
I appreciate that all affected leaseholders who have seen significant increases in the cost of their building insurance simply want the cost to come down, now more so than ever as family budgets are increasingly squeezed. Whilst I can assure you that we are continuing to work at pace on developing the scheme – which would be a significant intervention in the insurance market – there is work to be done before we can confirm it will go ahead.
Firstly, the launch of the scheme is dependent on satisfying a number of key factors to confirm its operational and commercial viability and which will need to be undertaken in a way compliant with competition law. This is our next focus and, should those factors be met, we’ll be working towards a timeline of launching by the summer of 2023 or earlier if possible.
Secondly, it’s important to say that, should the scheme go ahead, it will not be permanent. It has been designed as a short-term and time-limited (four to five years) intervention to assist leaseholders with the high cost of their insurance pending remediation. The central underlying reason that premiums are high for these buildings is the systemic failure of the building regulatory regime which insurers previously had confidence in and relied on in making pricing decisions. So it is the remediation of affected buildings to a standard that ensures life safety and property protection which remains the ultimate solution to addressing the high cost of insurance, and we continue to urge the Government to progress this work more swiftly.
It has also been designed to reduce costs for the buildings most significantly affected by the cladding crisis, where the fire risks are at their worst and therefore where costs for leaseholders are highest. There is no single insurance intervention that can help all leaseholders equally.
But that brings me to a final and important point which we have also made clear to Government. We fully recognise the role the insurance industry has to play but there are, of course, other potential options outside of our control which will further reduce costs for leaseholders. Reducing or removing Insurance Premium Tax on the premiums paid on affected buildings would certainly help by providing an immediate 12% reduction in costs. As would Government financial backing of the risk-sharing scheme by covering catastrophic fire risk losses over a certain amount. Considering the level of insurance broker commission and rebates to managing agents may also reduce costs for leaseholders, as noted by the FCA in their September report. So we are keen to understand how the work that we have progressed to develop a risk-sharing scheme can be complemented by these other potential measures.
We will continue to discuss this with Government and the wider industry in addition to working at pace on the next steps to understand the viability of the risk-sharing scheme. As soon as we are able to communicate further on this, and the specific details of how the scheme would work in practice, we will do so.