BIBA response to FCA papers on multi-occupancy leasehold insurance reforms
21st April 2023
BIBA supports the four changes the FCA wants to bring to the market to improve transparency for leaseholders and believes leaseholders need to be treated as ‘partial beneficiaries’ in the building insurance contract.
BIBA has agreed a member pledge with its Real Estate Members around providing fair value, which has now come into effect. This is subsequent to the review period that informed the FCA report (1/1/19 – 30/9/2022).
We will work with members to enable full disclosure of information to leaseholders via the freeholder. We note that the FCA confirm that most brokers provide appropriate information about the policy, and nature of their remuneration to their customers (freeholders) today.
We contend that any increase in commissions in the review period is not the primary driver for increased premium costs on leaseholders.
BIBA members are already adjusting their practices to stop sharing of commission with property managing agents, freeholders and landlords.
BIBA has pioneered a reinsurance scheme with the ABI to provide an answer to affordability and risk capacity for impaired buildings.
BIBA broadly welcomes the FCA’s announcement to give new rights and protections for leaseholders to improve transparency and disclosure within the multi-occupancy leasehold buildings insurance market.
BIBA supports the four changes the FCA want to bring about in the market, which are:
the interests of leaseholders (and others in similar positions) are properly considered when firms design their products
prices are fair value to leaseholders as well as freeholders
remuneration of all parties involved in insurance distribution has a fair relationship to the benefits provided to leaseholders
leaseholders have sufficient information to challenge poor practices and unfair costs passed on to them
We offer viewpoints on the main sections of the FCA report and consultation:
Leaseholders as ‘customers’ (See addendum 1 for detail)
We agree with the points the FCA raise about the practical challenges of leaseholders’ relationship to a policy, making it virtually impossible to comply ICOB rules where insurance is arranged for a multi-occupancy property.
We also agree that the FCA should not extend other parts of ICOBS to leaseholders for the reasons explained in the report that the combined effects of the proposals on disclosure and on the status of leaseholders means that much of the ICOBS requirements will, in any case, apply for the benefit of leaseholders.
We believe that a good approach would be to treat leaseholders as ‘partial beneficiaries’ to the insurance contract in accordance with existing FCA rules. In other words, bring leaseholders within the definition of ‘beneficiaries’ that exists currently in the Glossary to the FCA Handbook. This would provide them with the transparency and information needed.
Disclosure
We will work with members to enable them to provide the information on policy summaries, pricing information and remuneration to leaseholders along with the number of alternative quotations obtained.
We agree that the broker’s duty is to supply the information to the freeholder. However we would then expect the freeholder to be responsible for the onward transmission of the data to their leaseholders. We note that the FCA has recommended that DLUHC considers legislation on this point.
Remuneration and Fair Value
We note that the FCA finds insurance premiums have increased by 56% from 1 January 2019 to 30 September 2022, but that broker earnings increased at a lower rate during that period (40%). The increase in average broker commission accounts only for 20% of the increase in gross premiums written so we contend that the increase in commission earnings is not the primary driver of increased insurance costs being paid by leaseholders. The report does not acknowledge the fact that, in the current climate, work being done by brokers to place these sometimes very difficult risks with complex reinsurance arrangements has increased substantially. Indeed our members tell us that very few insurance placements of multi-occupancy buildings are simple anymore, with each one taking more time than it used to resulting in further increased costs for the broker.
Importantly, this report shows lower average rates of remuneration for brokers than found in the FCA’s initial review, and that both average commission rates and remuneration percentages as a proportion of gross written premium have been reducing since 2019. We note that the FCA is not seeking to ban or cap commissions.
Fair value rules are relatively new and there have been delays in their implementation that were outside of brokers’ control. That said, we know that our members who operate in this segment are very conscious of demonstrating fair value which is why our 2023 Manifesto includes a member pledge which promises:
We have an objective to work with our broker members individually to support them where necessary, as they review their remuneration practices for the distribution of insurance for multi-occupancy buildings.
The aim is for members only to make payments to third parties in this sector where they are satisfied that such payments comply with the relevant FCA fair value requirements. This includes payments to property managing agents or freeholders.
In January 2023 DLUHC announced it would bring forward legislation to prohibit the sharing of commission with property managing agents, freeholders and landlords for the work they do to administer insurance arrangements. Our members are already adjusting their practices to anticipate this change.
In addition, we feel that we need to clarify that the £80M of commission stated to have been shared with such parties in the insurance distribution chain for their work is over a 45 month period and is not an annual figure.
In respect of retained broker earnings, it should be noted that as premiums reduce in a soft market, commissions and total earnings will equally reduce while the level of expense within the broker remains the same. Historically, periods of rate softness have greatly exceeded periods when rates were ‘hard.’ The market experienced a period of softness from 2003 until 2019. The period since then has seen rates increase significantly, but property rates have been slowing once again.
In terms of the reported margin over and above staff costs directly associated with the placement and servicing multi-occupancy buildings, it should be remembered that this does not equal profit since indirect costs will be considerable, notably a share of management overhead, operational, compliance and marketing functions plus an allocation of general expenses such as rent, rates, utilities etc.
Inflation is at its highest point in 30 years and the cost of compulsory professional indemnity insurance for brokers has increased significantly which means that brokers need to earn more to cover their costs.
In general
BIBA recognises the thoroughness of the FCA’s further report into the distribution of insurance for multi-occupancy buildings and understand that the 16 firms who were part of this in-depth study cooperated constructively with the regulator.
Making positive change with a reinsurance scheme
BIBA’s work on this issue has been focused primarily on the question put by the Secretary of State to the FCA and CMA in January 2022 to explain ‘why has the cost of insuring multi-occupancy buildings increased so much in recent times?’ The explanation is that on difficult cladded buildings, insurers have reduced line size because of perceived increase in the fire risk, resulting in the broker having to buy expensive facultative reinsurance to ensure the building is properly protected.
We consider that the FCA is correct in that an effective way to help reduce prices for many leaseholders in high rise multi-occupancy buildings requiring remediation is the creation of a cross-industry risk pooling arrangement where the risk of covering certain high risk buildings can be shared across multiple insurers.
This is why implementation of the reinsurance scheme noted in the FCA report and the letter to the Secretary of State is so important and something which BIBA pioneered.
The development of a reinsurance scheme to provide new capacity for insurers active in the real estate segment is at an advanced stage and we are working closely with the ABI and DLUHC to implement it by summer 2023. This will enable insurers to deploy more capacity on buildings that have fire safety defects, dispensing with the need for excess placements which should allow premium levels to ease.
IPT
We feel it was a serious omission in the report not to highlight Insurance Premium Tax as a driver of harm in these cases. The FCA report notes that average premiums have increased from £7,470 in 2019 to £11,625 in 2022. It follows that IPT earnings by Government have increased significantly with Government providing no value to the distribution chain or leaseholders. Our 2023 Manifesto calls for a specific IPT exemption for cladded buildings undergoing or awaiting remediation and we ask strongly that this be reconsidered.
Summary
These issues have formed a core part of our Manifesto work for the past three years. We believe BIBA and our members have accomplished a lot in that period, notably:
Finding solutions for numerous multi-occupancy buildings that have significant fire safety defects and which might otherwise have been left uninsured.
Pioneering the reinsurance scheme with the ABI to provide an answer to affordability and risk capacity for impaired buildings
Agreeing a member pledge around fair value, which has now come into effect subsequent to the review period of the FCA work.
Working with members to significantly calibrate downwards earnings on cladded buildings. In particular some members have, as highlighted by the FCA report, moved to a lower fee-based remuneration in lieu of their normal commission approach.
Highlighting the problem of a lack of affordable professional indemnity insurance to enable professionals to undertake remediation work and proposing to Government a range of possible solutions, some of which have been acted upon. For example the EWS1 scheme
Launching with the ABI, a common code for the collection of data relative to multi-occupancy buildings with fire safety defects so that we can better track what happens to premium once a building is remediated.
Working with our members to provide education and advice on demonstrating fair value and delivering robust and consistent Fair Value Assessment documents.
Addendum 1 FCA view of leaseholders as customers
We have considered the following practical challenges respondents highlighted in response to our suggestions in our report. Most ICOBS rules are concerned with the relationship between insurance firms and customers in regard to an individual policy of insurance (for example, the way in which a policy is sold). The current structure of a single insurance policy providing cover that benefits all leaseholders in a property makes it virtually impossible for firms to comply with many of the ICOBS requirements:
There could be thousands of leaseholders covered under a single policy, none of whom have any direct relationship between the insurer or intermediary. This lack of a relationship would make it impractical for firms to comply with most of ICOBS. For example, it would not be feasible for firms to comply with the demands and needs rules and other sales standards for advised and non-advised sales, for thousands of leaseholders under a policy.
Situations where most leaseholders are happy with a policy but a small minority are not would in effect create a right of veto, which would be unworkable.
Leaseholders frequently change during the term of the policy and assessing needs for a policy mid-term would be impractical.
We believe these practical challenges will make it impossible for firms to adequately comply with the rules. It could also create very high costs to firms which would be disproportionate to the harm, and which ultimately will have to be borne by the leaseholders.
-ENDS-
Notes to editors
View the FCA press release
Read CP23/8: Multi-occupancy building insurance.
Read the FCA’s multi-occupancy buildings insurance broker remuneration review.
Letter from the Secretary of State for Levelling Up, Housing and Communities to the Chief Executive of the Financial Conduct Authority
Letter from the Secretary of State for Levelling Up, Housing and Communities to the Chief Executive of BIBA
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About the British Insurance Brokers’ Association
The British Insurance Brokers’ Association (BIBA) is the UK’s leading general insurance intermediary organisation representing the interests of insurance brokers, intermediaries and their customers.
BIBA membership includes around 1800 regulated firms, employing more than 100,000 people. General insurance brokers contribute 1% of GDP to the UK economy; they arrange 74% of all general insurance with a premium totalling £85.8bn and 93% of all commercial insurance business. Insurance brokers put their customers’ interests first, providing advice, access to suitable insurance protection and risk management.
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