The Financial Regulatory Authority (FCA) wrote to the government last week, with an interim review of its investigation. In January, Gove told the FCA to examine why some leaseholders in high and medium rise properties faced yearly increases to their buildings insurance.
The regulator said it would focus on identifying potential harms to residential leaseholders and work with the government to seek ways to reduce rising premiums.
In the FCA’s review, it said building safety concerns which went beyond flammable cladding may be the cause for rising costs. It said this “may be making individual insurers more risk averse”.
It added its data gathering was in its early stages, but so far it found leaseholders tended to pay insurance costs to freeholders under their contract rather than directly to the insurer. Additionally, it said portfolio underwriting was common in the market, meaning a single policy tended to cover multiple buildings. The FCA said this made it hard to identify the direct impacts on residential leaseholders.
The potential harms revealed by the FCA included the fact that some insurers had withdrawn from the market, limiting competition and the pressure to lower prices.
Furthermore, some insurers avoided bidding for new business with multi-occupancy blocks and when they did, high premiums were often charged. The FCA said it was unclear whether this was reflective of actual risks, inaccurate assessments or a strong aversion to risk.
It also said insurance premiums for buildings with no flammable cladding were still high due to broader issues with building quality, like inadequate plumbing systems.
Additionally, the FCA found freeholders, property managing agents and insurance brokers may be choosing insurance policies which maximised their own remuneration, rather than the policy that offers the best value for the leaseholders.
It also said there was a “lack of pressure” on freeholders, property managing agents and insurance brokers to search for cheaper policies. It said this was because they knew costs could be recovered from leaseholders, and leaseholders were unlikely to challenge policies or existing commercial arrangements.
The review also said switching costs and long onboarding processes may deter policyholders from moving onto a new plan.
In his letter to Sheldon Mills, executive director, consumers and competition at the FCA, Gove wrote: “It is neither fair nor decent that innocent leaseholders should be landed with bills they cannot afford as a result of problems they did not cause.”
He also asked to understand what could be done to encourage new entrants into the market to improve competition.
Gove added: “I am keen to review how all actors in the insurance marketplace have contributed to high premiums for leaseholders.
“The findings of the FCA review will be critical to developing a full understanding of the issues in the buildings insurance market. It is important that any recommendations consider all routes, whether enacted by the regulator, government or industry, to ensure leaseholders get the value for money they deserve.
“I request that you continue to consult with the Competition and Markets Authority, particularly as remedies for the current market environment are considered.
