Insurance Commission Commotion

Hot on the heels of the successful and inaugural Manchester event on 28 September, Proper Talk returns, this time in central London for a breakfast session on 6 December.

Proper Talk is a robust expert panel discussion in front of an audience of property professionals. It is a joint venture of Bridge Insurance Brokers, JC Property Consultancy and my own company, EK Reinstatement Cost Assessments, and the first two events are dominated by the insurance issues of day: Insurance commissions/remuneration, fair value assessments, the dangers of over and under-insurance, and the growing threat to all stakeholders of costly litigation if you get it wrong!

As a building surveyor and practitioner of reinstatement cost assessments, I have always appreciated that the two main ingredients of a buildings insurance premium are: (1) the rate that the insurer charges you, and (2) the declared value (rebuild cost) of your property.

It’s a simple equation:

Rate (%) x Declared Value (£) = Premium (£)

An example:

0.15% x £5,000,000 = £7,500 plus insurance premium tax of 12% = £8,400.

This £8,400 is what the leaseholders are obliged to pay, usually requested via the service charge.

So the higher the rate and/or the higher the declared value, the higher the premium that leaseholders pay.

My job and that of my team is to deal with the second part of the equation (declared value), and our approach is ‘lean and accurate’. Too low a declared value, then you run the risk of under-insurance. Too high a declared value, and your leaseholders are paying more than they need to.

My colleagues at Bridge Insurance and other reputable insurance brokers are responsible for procuring buildings insurance policies from underwriters that set the rate (%), so this is just as important as getting the rebuild cost right. The rate includes both the net cost of the insurance AND insurance commission received by the broker. Brokers legitimately earn commissions from insurers, and if these are reasonable and commensurate with the work required in procuring and managing the policy, there are rarely any disputes.

However, when the total commissions are deemed to be excessive, this is when the Financial Conduct Authority (FCA) may step in to put a stop to the ‘profiteering’.

Back in January 2022, the Secretary of State for Levelling Up, Housing and Communities wrote to the FCA and the Competition & Markets Authority (CMA) in relation to buildings insurance premiums for leaseholders living in buildings with cladding. The Association of British Insurers (ABI) and British Insurance Brokers’ Association (BIBA) sat up and took notice, and encouraged their members – insurance underwriters and insurance brokers – to act reasonably and sustainably. These enquiries in relation to the most at-risk blocks of flats, led to a wider investigation and consultation into the practices of blocks of flats insurance brokers in particular. This investigation brought into scope managing agents and landlords both of whom legitimately (and not so legitimately) share the broker’s commission.

Much consultation later and the Department of Levelling Up, Housing and Communities (DLUHC) and the insurance regulatory body, the FCA, announced the following on 29 September 2023:

1. FCA: From the new year, insurance firms will be forced to act in leaseholders’ best interests, treat leaseholders as customers when designing products and will be banned from  recommending an insurance policy based on commission or remuneration levels. Insurers will also be required to ensure that their insurance policies provide fair value to leaseholders and provide important information about their policy and its pricing, including the detail of any commission paid for leaseholders.

2. DLUHC announced that it intends to ban the payment or sharing of insurance commissions with property managing agents, landlords and freeholders. The FCA will work with DLUHC to ensure that this action is fully delivered, including changing FCA rules if required.

Proper Talk on 6 December promises to be a lively affair. Robust discussion will be matched by practical advice, and attendees will have an opportunity to pose questions to a property, legal and insurance expert panel.

For further information about Proper Talk, contact me on [email protected].