My priority in this role is the same as it was for my predecessor: to find a way to help leaseholders, by which we also refer to owners in Scotland, affected by the building safety crisis with their insurance costs.
There are several strands to our work, from establishing a risk-sharing scheme to supporting the broader industry action being co-ordinated by the FCA. As we submit our response to the FCA’s latest consultation, it’s a timely moment to provide an update.
FCA multi-occupancy leaseholder insurance reforms
In September 2022, the FCA published a report looking at the factors affecting insurance premiums for multi-occupancy residential buildings and the impact on leaseholders. It found that the issues in the market were most notable for buildings affected by cladding and other material fire safety issues. It also found that a lack of transparency over the details of the building insurance premium, and difficulties getting hold of even limited information, was adding to leaseholders’ distress. Earlier this year, the FCA set out proposals to help leaseholders by ensuring their interests are properly considered when firms design the insurance product, and that they have sufficient information about the policy. We support this work. It’s important that leaseholders can obtain clear information about the insurance policy for their building and the cost of it. It’s why we also join the FCA in calling on the government to make it a legislative requirement for freeholders to share relevant information with their leaseholders.
Risk-sharing scheme
In James Dalton’s last blog he talked about the work being done by the insurance industry to establish a risk-sharing scheme for some multi-occupancy high rise buildings with material fire safety issues. We have been working extremely hard with insurers involved in the scheme and with McGill and Partners, who are the reinsurance brokers designing the scheme. This work has continued as a priority to be ready to launch this summer.
Insurance is a business based on pricing of risk, with the claims of the few being covered by the premiums of the many. One of the drivers for increasing insurance premiums has been the number of different insurers needed to provide cover for just one building, given the risk posed by fire safety issues discovered under a building regulatory regime that was declared by Dame Judith Hackitt’s review of building regulations and fire safety as “not fit for purpose”. Despite government action to strengthen the regime, insurers still have concerns and the risks involved for one insurer alone are often too significant as it stands. The scheme looks to deal with this issue with the help of reinsurers who will provide the back-up insurance for the buildings entered in the scheme. By putting the buildings together in the scheme, the reinsurers can see the broader picture of the risk attaching for all such buildings and price for that accordingly. In turn, it means one insurer can again look to provide cover for a whole building and is expected to make the overall insurance costs in relation to fire risk cheaper in the process.
The scheme will be time-limited, acting as a temporary solution until buildings can be safely remediated. Six of the ABI’s members who underwrite many of these buildings are currently involved in the development of the scheme: this will include some of the most difficult buildings affected by fire and building safety issues. There are still some commercial aspects to work through and we’ll set out more information in due course on what both leaseholders and freeholders or property managing agents need to know about how the scheme will work. In the meantime, we continue to encourage more firms to come forward to discuss entering any buildings they insure into the scheme.
Further support for all leaseholders
We are acutely aware that there are many more buildings across the UK which are affected by building safety issues. There is no one single insurance intervention that will help all leaseholders equally, and as such this scheme won’t be able to help all affected buildings. However, there are more actions which could be taken to help reduce costs for leaseholders. As a matter of urgency, we want:
- the government to consider financially backing the scheme by covering catastrophic losses over a certain amount, which would help to increase capacity in the market even further.
- the rate of Insurance Premium Tax to be removed from the premiums paid on affected buildings. This would immediately reduce costs by 12%.
- swifter remediation of buildings awaiting works for fire safety issues. The only way to substantially reduce the insurance costs for affected buildings is to repair them to a standard that saves both lives and the property. The removal of combustible cladding, whilst an important start, could still leave the building with other fire safety issues such as combustible insulation which may cause fire to spread rapidly and significant damage to the building. People need to feel safe and protected whilst in their homes. Life safety is imperative, but we also need to ensure that, once people have safely evacuated the building, the risk of significant fire spread is reduced to ensure the building doesn’t continue to burn down, destroying their homes. We will soon be setting out how the industry believes remediation standards should be improved to increase the resilience of a building as well as ensuring the safe evacuation of its residents. This would aim to reduce the fire risk of a building which would be reflected in the premiums for the longer term.
- clarity on how the information collected through a ‘golden thread’ throughout a building’s life will be recorded and stored. We have long been supportive of this idea, recommended in Dame Judith Hackitt’s review and included in the Building Safety Act. It will be crucial for insurers to be able to access this information to have a detailed understanding of a building’s construction and risk profile, and to rebuild confidence.
As well as these steps, we also support the work of the FCA and government in looking at how any savings for leaseholders could be made, such as through the commissions paid to freeholders and property management agencies.
Working collectively, more can be done to support leaseholders and we remain ready to work further with government and the regulators on this.