The Cladding Crisis has loomed large over UK leaseholders for years now. It’s a multi-faceted issue with safety and financial concerns front and centre, but the effect of unsafe cladding on flats insurance is now in the spotlight.
We issued out the release below a couple of months ago and have since been involved in several FCA meetings to discuss solutions to resolve the reasons around the “crippling costs” with much focus on the costs for leaseholders. The FCA have gathered data from Insurers and brokers in the sector to consider solutions. Changes are afoot, watch this space.
Clarifying Common Questions RE Unsafe Cladding and Premiums
James Dalton, Director of General Insurance Policy at the Association of British Insurers fields some of the most common queries he receives regarding the increase in insurance premiums for dangerously cladded buildings in his article from February last year. We’ve summarised some of his key points below:
- Why have insurance costs increased for our block even though the cladding has always been in place?
“Historically, insurers of high-rise buildings would have only had to prepare for a loss caused by damage to just a few flats within a building. That is because the design and construction of that building, with the right materials and fire safety provisions in place, should have limited the spread of fire…
The reality is that today, insuring a ten-storey building of 60 flats, is a very different proposition when the maximum loss could well be the whole building. Insurers therefore have to work on the basis that the costs of fire in these buildings are significantly higher than originally thought and that some of them are an ongoing fire risk.”
- Are insurers exploiting vulnerable people and profiteering by significantly increasing premiums?
“There is no evidence for the ‘profiteering’ jibe and given the efforts insurers have made to provide ongoing coverage to high-risk buildings since the Grenfell fire tragedy, such occasional claims feel in poor taste.
Firstly, the cost of a premium – for any insurance product – is primarily driven by risk and, for the reasons set out earlier, a number of the buildings that we’re discussing are dangerous and present a higher insurance risk.
Secondly, insurance is a highly regulated industry where firms not only have to hold enough money to be able to pay out on a claim, they have to hold significant additional amounts in reserves on top. That means for every building with combustible cladding that an insurer has on its books, millions of pounds need to be put aside in case anything should happen. With more and more risky buildings being discovered and more and more issues beyond cladding causing concern, this has become a significantly more costly exercise. It is not surprising therefore that highly-regulated insurers have to manage their finances accordingly.
Thirdly, it’s worth remembering that 12% of every insurance premium is Insurance Premium Tax (IPT) meaning that 12% of the premium being paid is going to the Treasury. This has been doubled by the UK Government since 2014.”
- Why is establishing a waking watch or installing a fire alarm not always reflected in the insurance premium?
“While waking watches are a tool to assist evacuation and save lives, they are not a solution for preventing costly damage to the building.
The addition of sprinklers to a building is one fire safety measure that might have an impact on an insurer’s risk perspective, but sadly it generally remains the case that buildings with combustible cladding are a higher risk and the premium will continue to reflect that.”
Government Intervention
Michael Gove, Housing Secretary, has been very vocal about his feeling towards the insurance industry and has openly criticised firms in a letter to the Financial Conduct Authority in January of this year.
Regarding his letter to the FCA, Gove is quoted as saying: “I have been particularly concerned to hear of cases where insurance premiums have escalated by over 100% year-on-year, leaving residents with crippling costs. It is clear to me that the insurance market is failing some leaseholders.”
He has asked the Financial Conduct Authority (FCA) to review the buildings insurance market for multiple-occupancy residential buildings, together with the Competition and Markets Authority (CMA).
In response to Mr Gove’s request for a review, the FCA said it shared his concern about rising costs and the lack of understanding around data, with Nikhil Rathi, chief executive of the FCA, saying “While accurate, risk-based pricing is fundamental to an insurer’s obligations to maintain solvency, there are other elements, such as distribution costs, which also affect price. We therefore want to ensure that products provide fair value, and premiums fairly and accurately reflect risk.”
James Dalton (ABI) has responded by welcoming the request to the FCA: “Insurers recognise and sympathise with the challenges leaseholders are facing in terms of the increased cost of buildings insurance and have been working with the government and FCA to identify options to assist leaseholders until the necessary remediation work has been completed.”
Mr Gove expects a final report to be out by June 22 after some initial feedback on the issue by March 22.
A Compounding Issue: Professional Indemnity Insurance for Inspectors
To add another layer of difficulty to the situation, many leaseholders are unable to sell their homes due to delays in having the cladding on their building competently inspected.
Inspectors are struggling to secure suitable PI cover (insurance that covers construction professionals from negligence claims) due to firms either withdrawing from the market or radically reducing the level of cover available because of concerns over potentially huge pay-outs that could result if another tragedy, like Grenfell, was to occur.
This is leading to a backlog of inspections and EWS form completions for mortgage providers as well as ‘deadlock’ when inspectors refuse to accept liability and sign off on buildings.
A spokesperson for the ABI said: “There is a level of uncertainty on insuring the construction industry, who are currently operating in a regulatory environment that has been classed as not fit for purpose, and a general view that there is a lack of competence around all those involved in fire safety of a building.
“The ABI has emphasised the importance of meaningful change through the review of building regulations to provide greater confidence to the market. Regulations on which PI insurers had previously relied upon, but which ultimately had proven to be flawed, are in need of fundamental reform.”
As you can see, there is no simple or quick fix for the current insurance situation for those in unsafely cladded buildings. All we can hope for is for a level-headed approach to be taken by insurance firms, for the Government to continue its work in protecting leaseholders from unfair costs and for the market to settle in turn.
