The UK financial regulator has warned that “significant” intervention may be needed to tackle the high cost of insurance for tenants of high-rise buildings in the wake of the Grenfell Tower tragedy.
The building safety crisis in the wake of the 2017 fire in a London block that killed 72 people has prompted insurers to pull out of multi-occupancy buildings or charge much higher premiums to cover potential payouts.
In a letter sent Tuesday to Housing Secretary Michael Gove, the Financial Conduct Authority’s executive director, Sheldon Mills, said the price increases could be the result of insurers “shying away” because of the costs of doing that the buildings are safe.
But he added that the regulator was concerned that “factors such as high commissions paid to brokers and property managers, and a lack of competitive pressure on prices” could be contributing to the problem.
Renters are not normally a party to the insurance contract, but the price of the coverage is passed on to them in the form of service charges. Outright owners typically purchase the policy, which can cover multiple buildings, often with the services of a broker.
The FCA, at the midpoint of a six-month investigation, said that while it was too early to draw firm conclusions, its work suggested freeholders, property-managing agents and brokers “may be selecting insurance policies that maximize your own pay. . . instead of the policy that offers the best value for renters.” Homeowners may not have “any incentive to look for cheaper policies” since they pass on the costs, she added.
The watchdog said it was considering measures to cap the commissions brokers can receive; prohibition of commissions based on a percentage of the premium; and improve insurance information provided to renters.
“Any such intervention would be significant, with the potential for unintended adverse consequences, and would require a strong justification to meet our statutory goals,” he said.
However, he added that “if our work determines that price increases are a legitimate reflection of increased risk, it is unlikely that we would want to intervene.”
It also made clear that there were limits to its powers to reduce the fees that freeholders charge tenants, noting that some property managers were not bound by its rules.
The British Association of Insurance Brokers, a trade body, said it was “the first time we’ve heard of possible limits on brokers’ commission”, pointing to other factors in the cost of cover, such as tax on insurance premiums. insurance.
“Savvy brokers are working harder than ever to place insurance, having to arrange complex co-insurance or reinsurance programs as primary insurers reduce their exposure on certain high-rise residential buildings,” he added.
Liam Spender, a trial attorney and tenant caught up in the building safety crisis, gave a cautious welcome to the FCA letter. “[It] it addresses a lot of issues that leasing activists have been talking about for a few years,” he said. “But as with all things leasing, the new rights are only as good as the owners’ compliance with them.”
In the wake of the Grenfell Tower fire, which started on just one floor but quickly destroyed the block, insurance costs began to rise for many tenants. Many have little idea how premiums are calculated.
The FCA letter notes that “unlike retail products, some of the key data points are often not systematically maintained by insurers or brokers.”
Another option being discussed with the government is an arrangement whereby insurers pool risks related to certain buildings, perhaps with compensation from the government.
The Association of British Insurers, a trade body, said it was sympathetic to the tenants. “We support the FCA’s work to review how the multi-occupancy buildings insurance market works and, together with our members, continue to assist,” said James Dalton, director of general insurance at ABI.