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'Crippling' cladding insurance costs to be investigated

·3-min read
The remains of Grenfell Tower in North Kensington, London, U.K., on Tuesday, Jan. 11, 2022 - Hollie Adams/ Bloomberg
The remains of Grenfell Tower in North Kensington, London, U.K., on Tuesday, Jan. 11, 2022 - Hollie Adams/ Bloomberg

The City watchdog is to investigate “crippling” insurance costs paid by residents of apartment blocks with unsafe cladding after Michael Gove accused the industry of “failing” leaseholders.

In a letter to insurers, brokers and property managers, the Financial Conduct Authority (FCA) demanded explanations for how skyrocketing insurance costs are calculated and warned them over lucrative commission fees.

The regulator’s intervention comes after Mr Gove, the Levelling Up Secretary, wrote to the FCA and Competition and Markets Authority (CMA), asking them to look into the price increases and the reasons why coverage was limited for properties in multiple-occupancy buildings.

Mr Gove said he had heard from “innumerable leaseholders” in mid to high-rise buildings, many of which had seen insurance premiums double in just a year after flammable cladding and other widespread defects was exposed in the wake of the Grenfell Tower fire.

It has prompted concerns that many residents are being overcharged in opaque deals where brokers and building owners are receiving inflated commission fees.

Building freeholders or managing agents are usually responsible for arranging insurance but they then pass the costs on to leaseholders through ground rent or service charges.

However, critics say this creates an incentive for unscrupulous freeholders and agents to create kickbacks for themselves by getting brokers to negotiate fatter commission fees.

The FCA has now told insurers, brokers and property agents to justify skyrocketing premiums in full and explain how they “provide fair value”.

In its letter to insurance firms and their middlemen, published on Friday, the regulator acknowledged that rising prices were partly due to the increased perceived fire risk.

But it also told firms they have a duty to ensure fair value for leaseholders, who ultimately pay for policies, and warned them against taking commission fees that “do not reasonably reflect the costs incurred or the benefits provided by the intermediary or others in the chain”.

The move came after Mr Gove, who has vowed to shield leaseholders from costs associated with fixing the building safety scandal, claimed the insurance industry “lacks transparency” and called on the FCA to investigate rising prices.

In a letter that was also published on Friday, Mr Gove: “Since I took office, I have been extremely concerned to hear from innumerable leaseholders about the pressure they face from rapidly escalating building insurance premiums on high and medium-rise blocks of flats.

“I have been particularly concerned to hear of cases where insurance premiums have escalated by over 100pc year-on-year, leaving residents with crippling costs.

“It is clear to me that the insurance market is failing some leaseholders.”

Mr Gove said insurance premiums had “increased dramatically” for almost all leaseholders in apartment blocks after Grenfell, despite work to remove flammable cladding from their buildings, and that many insurers had failed to offer new policies, restricting the options of residents.

He added: “The market lacks transparency… The role and remuneration of brokers, managing agents and freeholders is also unclear.”

In a reply, FCA chief executive Nikhil Rathi said he shared Mr Gove’s concerns and said officials were investigating the issue with help from the CMA.

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