The Financial Conduct Authority (FCA) has released its highly anticipated report on insurance for multi-occupancy buildings, prompting new Secretary of State for Levelling Up, Housing & Communities Simon Clarke to write to British Insurance Brokers’ Association (BIBA) chief executive Steve White about “disturbing” evidence in relation to remuneration.
The FCA’s 67-page report, which noted that premium rates for multi‑occupancy residential buildings have doubled between 2016 and 2021, reads: “The commission rate paid by the insurer to the broker varies significantly. In most cases within the observations we received and used for our analysis, it is at least 30% (they range from <10% to 62%). The level of some commissions in this market are an area of significant concern.
“The broker often shares the commission with the freeholder or the property managing agent. Brokers in our workshops explained they share their commissions so that freeholders and property managing agents can be remunerated for the support they provide to procure insurance and then to deliver elements of post sales service. For example, to provide necessary evidence on the buildings’ features, instruct survey work and administrative services.”
“Property managing agents, most of whom are not regulated by the FCA, are usually remunerated by the leaseholder for the activities they perform through a service charge,” continued the regulator, which outlined recommendations and potential remedies in its report. “Freeholders often play a more limited role in obtaining insurance. So, it is often not clear why it is appropriate or necessary for property managing agents or freeholders to receive additional remuneration via broker commissions.”
In response to this key finding, the FCA said it will undertake a review of the insurance brokers who charge the highest commissions and will also consider further rules on remuneration.
In his letter to White, Clarke wrote: “The report has brought to light disturbing evidence on remuneration practices. Broker commissions account for 30% of the premium, and the average absolute value of commissions has more than tripled for brokers between 2016 and 2021 (261% increase) to a mean of £4,690 per building. In most cases the broker shares their commission with the managing agent/freeholder: in more than half of cases, these parties receive 50% or more of the commission given to the broker. It is unclear how these practices can be of any benefit to leaseholders.
“The financial pressure currently placed on leaseholders is unacceptable. The real-world increase in the commissions passed to managing agents at the expense of leaseholders is amoral, lacks a connection to delivering a fair and quality product, and must cease as a matter of urgency.”
The MP, who gave BIBA until the end of the month to provide a timeline of the action it intends to take, added: “My department will work closely with the FCA to ensure action is taken to tackle these unfair commissions. I would like to see immediate changes to this practice and expect a proposal from BIBA setting out how you will address broker commissions and reform culture and practice within the market ahead of any further regulatory activity.”
Meanwhile, other findings of the watchdog’s review include an ongoing lack of transparency and disclosure for leaseholders from both the insurance and property sectors; a contraction in supply of coverage, given insurers’ limited appetite for buildings with flammable cladding; the fact that leaseholders are not classified as customers under FCA rules; shortcomings surrounding data availability, accuracy, and quality; and delays in efforts to better understand the risks being underwritten due to the lack of appropriately qualified surveyors and fire safety experts.
“We remain acutely aware of the challenges leaseholders affected by the cladding and fire safety crisis are facing,” commented Association of British Insurers (ABI) general insurance policy director James Dalton. “We support the FCA’s recommendations on a risk-sharing scheme and have been actively discussing various options with industry and Government. Our work in this area will continue at pace.
“The FCA’s detailed analysis provides important insight on the state of the insurance market for high-rise residential buildings with a clear recognition that there is no evidence to suggest insurers are making excessive profits.”
Dalton, who stressed that supporting leaseholders to reduce insurance costs is a priority for the ABI, went on to acknowledge: “We recognise the issues the FCA raises regarding the availability of information on these buildings and will work with our members, regulators, and relevant industries to achieve greater consistency in recording data. We are also committed to improving transparency for leaseholders and will work with the FCA to implement a framework that enables this.”
At the same time, Dalton maintained the ABI’s position that the “ultimate solution” to high insurance costs is the remediation of buildings to a standard that protects both lives and property.
Commenting on the FCA report, Aviva UK & Ireland general insurance CEO Adam Winslow expressed disappointment towards the company’s peers.
“The FCA found that there has been ‘a significant contraction in the supply of insurance’ and that insurers have ‘limited or no appetite for writing new business’,” he highlighted. “This view does not reflect the action Aviva has taken to provide fairly priced insurance for existing and new customers living in buildings with combustible cladding. We have always supported our existing customers faced with these issues, and in April 2021 we made our insurance available to new customers affected by combustible cladding.
“Since opening to new business, Aviva has helped more than 6,400 leaseholders secure fairly priced insurance – 1,200 of whom came to Aviva without any insurance in place, due to their inability to secure cover elsewhere. The remaining 5,200 new customers have seen an average premium saving of 60% since moving their insurance to Aviva. To further minimise cost and provide greater transparency, we have – for the last 18 months – capped broker commissions at 10% for these buildings, except where brokers have agreed an appropriate fee for their services with their customers.”
Winslow declared further: “Offering fairly priced insurance to new customers in cladding-affected buildings isn’t just the right thing to do, Aviva has shown it is also commercially viable. We are disappointed that other insurers have not yet followed our lead, as collectively we could ensure that all leaseholders living in such buildings have access to fairly priced insurance. A more formal pooling arrangement may now be necessary to support these leaseholders; we will, of course, continue to support the ABI’s work in developing this.”
Aside from creating a cross-industry pool, the FCA’s recommendations and potential remedies also span making it easier for leaseholders to challenge high insurance costs passed on to them and increasing the amount and transparency of available information on the pricing of the insurance they are paying for.
Meanwhile Clarke also wrote to the ABI on what his department expects of the trade body in light of the report, as well as to the FCA to thank the regulator for its work on the buildings insurance market.
“You noted several recommendations for Government to take forward,” wrote the MP to FCA chief executive Nikhil Rathi. “I am committed to taking action against abuses, including through legislation if necessary, and my officials will provide an update in the autumn on the available options and how we will address these recommendations.”
