Since the Grenfell tragedy in 2017 insurance costs for leasehold properties – particularly in mid and high-rise buildings – have soared. Whilst this has largely been driven by properties with flammable cladding and other material fire safety risks, an FCA investigation revealed wider issues in the insurance market that have led to poor outcomes for leaseholders who ultimately bear the cost of the insurance cover.
Status change will help defend leaseholders
The FCA will alter their rules to define leaseholders as customers placing an explicit requirement on firms to consider their interests when designing and distributing insurance policies.
Insurers will have to make certain that products provide fair value to leaseholders and supply important information about the policy, its pricing and the details of any commission paid to brokers, freeholders and property managing agents.
Brokers should immediately stop paying commissions to third parties where they do not have appropriate justification and evidence for doing so, in line with FCA rules on fair value. DLUHC announced their intention to back this with a future ban on insurance commissions for property agents, landlords and freeholders in their response to the FCA report.
Key problems with the insurance market
In their report on insurance for multi-occupancy buildings the FCA laid out several issues which they found were having an impact on outcomes for leaseholders.
A drop in supply leading to ineffective competition – Even before Grenfell, there were fewer than 20 insurers providing cover for mid and high-rise multi-occupancy residential buildings. Since then, many firms have scaled back or withdrawn from this market altogether. Fewer suppliers mean less choice for consumers and less pressure on prices.
Premium rates doubled between 2016 and 2021–This increase is largely due to the risks from properties with flammable cladding, although the report was not able to conclude whether the premium rises were fair or appropriate for the risks being underwritten.
High commission rates – Brokers commonly arrange insurance on behalf of building owners or managers, and the most usual way they earn money from this is through a commission model. Rates vary, but some were as high as 62%. The commission is often shared with the freeholder or property managing agent, which creates significant potential for conflicts of interest.
Lack of transparency – Although ultimately leaseholders almost always pay the cost of insuring the building their property is in, they typically do not receive relevant information about the policies and have no voice in choosing the insurer or broker. This leaves them unable to effectively challenge the costs passed on to them by freeholders.
Propertymark leasehold campaigning
We began our campaign for leasehold reform over five years ago. In 2018 we published a report titled Leasehold: A Life Sentence? Based on the findings, Propertymark helped to drive legislative change that has so far culminated in the Leasehold Reform (Ground Rent) Act 2022.
Property agents play a key role in supporting home buyers and sellers, and we welcome any moves to ensure adequate protection for consumers. However, there remain many issues with leaseholds which must be addressed.
In our latest report, Leasehold 2023: Has Anything Changed?, Propertymark member agents told us about concerns regarding the short period of many leases, the high cost of renewing a lease, difficulties obtaining information from management companies, and the need for more clarity on processes and rights for acquiring the freehold.
Policymakers must do more to create a level playing field with those who already own a leasehold property, make enfranchisement easier, and simplify the process for lease extensions and where there is no managing agent, freeholders must sign up for a redress scheme. A whole sector approach is needed to further protect consumers and bring about positive change for leaseholders.
The FCA’s move to support leaseholders in the multi-occupancy buildings insurance market is a positive step forward, but we believe that there is more work that needs to be done.
Developers should adhere to the Consumer Code for House Builders, freeholders of leasehold properties should all be required to sign up to a redress scheme, and more. Whilst we are happy with this move, we hope to work alongside the Government more closely to push for further changes.
