BIBA responds to multi-occupancy leasehold insurance reforms

Financial Conduct Authority wants four changes to happen

BIBA responds to multi-occupancy leasehold insurance reforms


By Terry Gangcuangco

The British Insurance Brokers’ Association (BIBA) has broadly welcomed the Financial Conduct Authority’s (FCA) plan to give new rights and protections for leaseholders to improve transparency and disclosure within the multi-occupancy leasehold buildings insurance market.

In its response to the multi-occupancy leasehold insurance reforms set out by the FCA, the trade body said: “BIBA supports the four changes the FCA wants 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; [and] leaseholders have sufficient information to challenge poor practices and unfair costs passed on to them.”

Meanwhile, the regulator stressed that it expects brokers to immediately stop paying commissions to third parties, such as property managing agents and freeholders, where there is no appropriate justification and evidence for doing so in line with the FCA’s rules on fair value.

“We will undertake further reviews across various products and will consider the full range of regulatory tools available to us as this work is progressed,” stated the watchdog.

“Following this review, we will take appropriate action where firms have significant weaknesses in meeting their regulatory obligations, including on fair value. We will engage the senior managers of other firms requiring improvement so they are fully meeting their obligations.”

BIBA’s contention

The association, meanwhile, made certain clarifications in its response.

“We note that the FCA finds insurance premiums have increased by 56% from January 1, 2019 to September 30, 2022, but that broker earnings increased at a lower rate during that period (40%),” said BIBA. “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.”

BIBA added that, in terms of the “relatively new” rules on fair value, there have been implementation delays that the trade body described were beyond the control of brokers.

“That said,” declared BIBA, “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.’”

BIBA also went on to explain one of the figures cited by the FCA.

“We feel that we need to clarify that the £80 million 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,” declared BIBA.

The trade body added: “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, however, BIBA is backing the abovementioned changes.

Reinsurance scheme

For BIBA, having a reinsurance scheme for this particular market will result in positive change.

The association highlighted: “BIBA’s work on this issue has been focussed primarily on the question put by the Secretary of State to the FCA and CMA (Competition and Markets Authority) 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.”

BIBA said it is for the above reason that implementation of the reinsurance scheme is critical and something which it pioneered. According to the trade body, the development of the scheme is at an advanced stage, with the view of implementing it by summer this year.

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