Biba urges Government to bring forward ban on sharing property commission

CEO Steve White also acknowledged a “remedy lies with [its] members” with regards to the quality and accuracy of the fair value assessments in the multi-occupancy buildings insurance market and it would be publishing guidance on best practice.

These have all been outlined in a letter to The Rt Hon Michael Gove MP, Secretary of State for Levelling Up, Housing & Communities, following his own communication to Biba about broker remuneration in light of the Financial Conduct Authority’s report last week into in the buildings’ insurance market.

In the correspondence, the Ministers gave Biba one month to drum up an action plan to address “completely unacceptable” practices in the buildings’ insurance market.

Gove has also written to FCE CEO Nikhil Rathi to express his “outrage” that in the past three years, broker commissions on buildings’ insurance rose 40% and £80m was shared out to third parties.

In Biba’s response to Gove, seen by Insurance Age, White outlined the work Biba is doing with Department for Levelling Up, Housing and Communities, and its members, on the insurance problems that stem from high-rise multi-occupancy residential buildings for more than three years.

Primary focus

He said: “Our primary focus has been to solve the cost of insurance for buildings that have significant fire safety defects and have suffered the most in terms of insurance premium increases. Insurers have reduced capacity or increased their rates to reflect the potential for a total loss in the event of a fire, as opposed to a partial loss.

“This has resulted in brokers having to undertake a lot of extra work to persuade several insurers to take a percentage of a ‘distressed’ risk and source facultative reinsurance in the London market, which is expensive, so that the client would not be left without the cover they needed.

“To that end we initiated the work to develop a reinsurance scheme to enable insurers to deploy more capacity on such risks with the aim of reducing premiums and we are working at pace with the Association of British Insurers to finalise this new facility by the summer.”

White said: “On these distressed risks, it is important to acknowledge that our members have deliberately calibrated down their earnings, often moving to a fee, to lessen the impact of the overall price increase on leaseholders.

“The FCA report confirms that the proportion of the premium paid to brokers in commissions has reduced and this demonstrates brokers’ commitment to lessen the impact on customers at the expense of their own earnings, while at the same time undertaking considerably increased amounts of work to meet their clients’ needs.

“The fact that brokers were not able to fully evidence to the FCA the steps they have taken, or the direct and indirect costs involved, does not mean that significant extra costs were not incurred. Our members are aware that the practice of sharing commission with property managing agents, freeholders and landlords for the work they do in administering insurance arrangements is due to come to an end following your announcement in January 2023.

“We would encourage you to bring forward the legislation to enact this as soon as possible to create a level playing field and avoid an early movers penalty. Prior to your announcement Biba had developed a new member pledge, which is included within our manifesto, to the effect that brokers would only make payments to third parties in this sector where they are satisfied that such payments comply with the relevant FCA fair value requirements.”

No longer simple

White told Gove that Biba members note 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.

He added that until insurers are convinced that standards of construction and the associated risks (including but not limited to the fire risk) present a more favourable picture than they do currently, their risk appetites for this type of business will remain at decreased levels and brokers will continue to have to work harder to obtain cover for clients.

“Importantly, this second report from the FCA shows lower average rates of remuneration for brokers than found in its initial review last September, and that both average commission rates and remuneration percentages as a proportion of gross written premium have been reducing since 2019,” White continued.

“The reported margin over and above staff costs directly associated with the placement and servicing of multi-occupancy buildings does not equal ‘pure’ profit. From the margin figure, brokers’ (indirect) operating costs must be deducted, notably a share of management overhead, compliance, audit and marketing activity, plus an allocation of general expenses such as rent, rates, utilities etc.

“The headline figures therefore do not tell the full story.”

Remedy lies with members

In conclusion White admitted that Biba agreed with the FCA that “the remedy lies in our members evidencing fair value in a more robust and consistent way”, and it will work with members to improve the quality and accuracy of the fair value assessments that they produce and invite the FCA to work collaboratively with us to this end.

He added Biba will issue guidance on what good practice looks like, drawing on the examples of better practice observed by the FCA.

Biba also agreed with the FCA’s point around better disclosure of information on insurance arrangements to leaseholders and again said it would work with members to enable better disclosure of information to leaseholders via the freeholder.

“Legislation from DLUHC to mandate that freeholders make better disclosure would be welcomed by our members, if this remedy is to have any success. We note that the FCA report confirms that most brokers provide appropriate information about the policy and the nature of their remuneration to their customers (freeholders) today,” White said.

“Finally, I would like to draw your attention to the linked issue of affordable and adequate professional indemnity insurance for those professionals looking to help with remediation of tall buildings that have fire safety defects. We have flagged with DLUHC on multiple occasions that lack of PII is acting as a serious brake on the pace of remediation and excludes many smaller firms from considering tendering for work that is funded by the BSF and mid-rise schemes.”

He added: “We have offered our thoughts on a range of solutions to solve the problem and would ask for your support here. This matters not simply because it is intolerable that many leaseholders are still living in unsafe buildings, but also, we know that once a building is remediated our members can negotiate the buildings premiums down to a significantly lower level.”

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