The Financial Conduct Authority (FCA) is making headway in its review of the way the market for multi-occupancy buildings insurance operates, as indicated in the regulator’s update to Secretary of State for Levelling Up, Housing & Communities Michael Gove.
In the FCA’s letter to the MP, the watchdog said its work over the past three months has focussed on gathering data and engaging with insurers and intermediaries to better understand their approach to pricing; considering the drivers of harm which may be impacting leaseholders; and developing initial options for ways the FCA could address any harms identified, as well as considering the scope of its powers and where harms would be better addressed through action by others.
“Our work gathering data and engaging with the industry is progressing,” stated the regulator, which noted that the market for multi-occupancy buildings insurance is complex and has features which create unique challenges for interventions. The goal of the data gathering is to identify market failures which may be causing harm to residential leaseholders. Potential harms relate to pricing and product supply, and product distribution.
In the letter’s annex, the FCA wrote: “The severity of the building safety issues that were brought to light following the Grenfell tragedy may have resulted in the following issues: a) insurers retrenching, shying away from bidding for new business of multi-occupancy buildings, or charging particularly high premiums to insure them. This could be risk-reflective, or it could be the result of inaccurate risk assessments or strong risk aversion; and/or b) some insurers withdrawing from the market, limiting competition and reducing the pressure to lower prices.
“Following the Grenfell tragedy, insurers may have also increased insurance prices for multi-occupancy buildings without cladding risks. This could be because: a) the issues with flammable cladding are seen as indicative of broader issues with building quality likely to lead to higher claims (e.g. issues with plumbing systems leading to claims for escape of water throughout a building); b) the elevated insurance premiums for buildings with flammable cladding acted as a reference point that also triggered higher premiums for buildings without cladding concerns; and/or c) products may not be priced fairly, leading to leaseholders paying excessive prices relative to the value the policy provides to them.”
As for product distribution, the regulator said there may be a lack of pressure on freeholders, property managing agents, and insurance brokers to search for the policy that offers the best value-for-money or to switch to better-value policies or cheaper alternatives which may benefit leaseholders. They may also be selecting policies based on their own remuneration.
The abovementioned scenarios are potential, and not yet confirmed, harms. So far, according to the FCA, it has already collected limited high-level data from a small number of firms. “This has informed our thinking and provided a steer on what further data we would require to gain a better understanding of the current operation of the insurance market for multi-occupancy buildings,” it noted. The watchdog has also had a series of meetings with representatives from insurers, brokers, and through trade bodies at both an executive and working level.
The first suite of insurer data has already been received, said the regulator. Meanwhile the separate information request that was sent to 26 insurance brokers and managing general agents has a May 18 deadline.
FCA consumers and competition executive director Sheldon Mills told the Secretary of State: “It is too early for us to confirm the harms present in the market or to make any recommendations about how they can be addressed. We will use the information we gather from industry to further develop options for potential interventions, including where we conclude that market or government-led interventions may be beneficial.
“We are working to produce our final report within the six-month period you requested in your letter. As well as providing this final report, we will continue our regular engagements with officials in your department.”
Possible interventions within the scope of the regulator’s existing powers include rules to limit commission, enhanced information disclosure, and extending the protections offered by some of the FCA’s rules (for freehold property owners) to leaseholders.
Part of the letter seen by Insurance Business reads: “A key aspect of our data analysis work is examining the way that insurers are assessing risk for multi-occupancy buildings. If our work finds that price increases are a legitimate reflection of increased risk, it is unlikely we will wish to intervene, given that it is not the actions of authorised firms that is causing harm, but the underlying increase in the risks being insured.
“If an accurate assessment of risk is the main driver of increased prices, this may require action across the industry and, potentially, government intervention.”
