Since the Grenfell Tower tragedy in 2017, insurance premiums on “multi-occupancy buildings” have increased dramatically. As a result, at the government’s request, the Financial Conduct Authority (FCA) has reviewed the insurance market for these properties. Helena Unwin examines this review and what changes leaseholders and freeholders can expect.
In January 2022, the government asked the FCA to review various elements relating to the insurance market for “multi-occupancy buildings” (defined as properties with common areas shared between more than one household).
The Secretary of State for Levelling Up, Housing and Communities, Michael Gove, indicated his intention to end “unusually high broker commissions” on buildings insurance for such buildings.
FCA report on insurance for multi-occupancy buildings
The FCA conducted the review in Autumn 2022 and found that the average cost of buildings insurance for multi-occupancy buildings more than doubled between 2016 and 2021. Although there were multiple factors in play, one key element was that several insurers withdrew from this market due to falling profitability for underwriters. Previously there had been approximately 20 insurers providing policies for multi-occupancy buildings, but this has now been reduced to only five.
Leaseholders pay managing agents or freeholders a service charge in relation to the upkeep of these types of buildings, including obtaining insurance. The FCA found that some insurance brokers would share their commission with the freeholder or managing agent, therefore creating an incentive for these parties to pay higher insurance premiums.
Some brokers were receiving between 10% and 62% commission on insurance premiums, with the average commission found to be 30%. Another issue noted in the review was that leaseholders were not made aware in clear terms of the commission arrangements taking place between insurers, brokers and freeholders or managing agents.
The FCA’s report observed: “It is not clear why it is appropriate or necessary for property managing agents or freeholders to receive additional remuneration via broker commissions. We are very concerned that this practice does not represent value ultimately for the leaseholder.”
Michael Gove responded to the FCA report at the end of January 2023, requesting an implementation plan for reforms by summer 2023.
In his response, he said he would “take action to ban managing agents, landlords and freeholders from taking commissions and other payments when they take out buildings insurance, replacing such payments with more transparent fees”. He also said the government would aim to “arm leaseholders with more information to enable them to better scrutinise their insurance costs, while also ensuring that [they] are not subject to unjustified legal costs”.
What does this mean for leaseholders, landlords and managing agents?
The FCA made several recommendations to the government, including ways for leaseholders to be made a party to insurance contracts so they can challenge insurance costs in a straightforward way.
However, it has been pointed out since Michael Gove’s statement that it is incorrect to suggest leaseholders are not currently able to request information about their insurance cover, as landlords must disclose this upon written request. The Service Charge Residential Management Code also provides that managing agents and freeholders should ensure all insurance policy terms are reasonable, any commissions agreed should be disclosed and insurance details are provided to leaseholders on request.
In addition, the FCA report noted that not all landlords would look at commissions when considering insurance policies for their buildings, so it seems unfair for all landlords to be criticised for this. It is also uncertain how removing these commissions would result in better value for leaseholders or tenants.
While it is difficult to say what the best option is for leaseholders and landlords moving forward, it is a positive move for leaseholders that issues such as high insurance premiums and service charges are being discussed seriously and openly by the government and that steps are being taken to resolve their concerns.
If you require further information on this article, please contact Helena Unwin at [email protected].
Disclaimer: The above is merely general guidance and should not be relied on as formal advice. We suggest you take professional advice before taking any action in relation to the issues discussed above.