Ahead for heights?

After years of adjournments and stalling in government, and a series of other setbacks, could progress soon finally be seen in the UK’s ongoing building safety scandal? David Adams investigates

Six and a half years after the Grenfell Tower disaster, the market for insuring high-rise, higher risk multi-occupancy residential buildings in the UK is now as much in need of repair as the least fire-resilient of those buildings. The costs and difficulty of finding insurance for these buildings have increased enormously, and attempts to complete remediation work have also been delayed by problems sourcing insurance for companies and contractors undertaking this work.

Between 2016 and 2021 premium rates for multi-occupancy residential buildings increased by 125 per cent, according to the FCA’s September 2022 report on insurance for multi-occupancy buildings.

“Insurers started asking a lot more questions … [and] in cases where combustibility issues were found, premiums increased,” says Alastair Blundell, head of general insurance at the British Insurance Brokers’ Association. “But capacity decreased at the same time. That caused immense pressure and concern for leaseholders and property owners.”

David Ovenden, chief underwriting officer at Axa, points out that price tends to be a function of market capacity. Where an insurer might previously have written 100 per cent of the risk attached to a building, the discovery of combustible materials, or a lack of fire resilience (protection systems, fire breaks and so on) in the building might reduce the insurer’s ability to underwrite that risk to 10 per cent.

“That means a broker would have to go out and get more capacity … and it can get expensive,” says Ovenden. “It’s unfortunate, but it’s logical, rational and defensible. It’s a balanced view of the risk we face.”

Other issues are also influencing the market, Ovenden continues. One is the difference between “fire safety” and “fire resilience”. The former may be applied to a combustible building that the fire service are confident they will be able to remove people from, simply because it is not a tall building. Insurers, the ABI and other experts are currently consulting with government on including a requirement for fire resilience in fire safety standards.

“We need resilience in there, otherwise the insurance industry is going to struggle to get premiums down to a level that people are going to want to pay,” Ovenden warns.

Meanwhile, the ABI, BIBA and McGill & Partners have been working together to create a Fire Safety Reinsurance Facility (which is due to be launched before the end of this year) in the hope that it would allow insurers to increase risk capacity for medium height and tall residential buildings with material fire safety issues. It could also mean insurers may be able to provide cover for whole buildings.

“That will allow mainstream insurers to look at these more difficult risks and offer more capacity, hopefully at a more affordable price,” Blundell insists. “So that is a glimmer of hope.”

The other key challenge lies in providing affordable insurance, particularly professional indemnity cover for companies and contractors working on remediation of existing buildings with fire safety issues.

One reason this problem persists is the nature of the two main routes to remediation work. The first is remediation by the developer that constructed the building. The second is via an application to the government’s Building Safety Fund, which was designed to enable remediation in buildings over 18m high. There is also a Cladding Safety Scheme, known previously as the Medium Rise Scheme, for buildings between 11m and 18m high.

There is some concern within the insurance industry about a lack of independent oversight in cases where the developer takes responsibility for remediation. Ovenden says Axa is among insurers that offer landlords support to ensure developers remediate the building to an A1 standard of fire resilience, with all combustible material removed from the structure “by helping the landlords ask the right questions”.

In cases where the Building Safety Fund is used, the other major problem is the obligation for companies and contractors carrying out the work to find PI cover of up to £10 million.

“The reality is that very few firms can purchase that level of PI,” says Blundell. BIBA fears this will leave remediation work as the preserve only of a few of the largest firms, reducing competition, slowing progress and keeping costs high.

It has suggested a range of measures to resolve these issues. They include reviewing PI requirements for both the Building Safety Fund and the CCS. BIBA supported the EWS1 approach (which, leaseholders tell us, has created its own, separate issues) for confirming that safety assessments had been conducted on buildings and suggests a similar type of modelling might be used to help insure professionals undertaking remediation work against safety liabilities. More radically, BIBA suggests that the government could consider removing the burden of professional liability from contractors responsible for fire safety or fire remediation work within these projects.

It also suggests reviewing the joint and several liability regime that governs UK construction contracts, replacing it with a more proportionate approach to allocating liability as is the case in the equivalent regime in Australia.

What the government has done so far in relation to the various issues around high-rise buildings and fire safety is to begin creating a new regulatory regime, in line with the recommendations of Dame Judith Hackitt’s Independent Review of Building Regulations and Fire Safety, published in 2018. Parliament passed new building and fire safety legislation in 2021, introducing new fire safety regulations, and created the Building Safety Regulator.

The new regime also mandates creation of a ‘Golden Thread’ of information about each building, stored in an accessible digital format, including details of Building Regulations compliance and the identification and mitigation of safety risks. Every building in scope will also need a Principal Accountable Person, responsible for managing the building’s safety, by preventing and reducing fire spread and structural failures. They will need to produce a safety case report summarising safety risks affecting the building and how these are managed.

“The undertaking of building safety case reports is a really positive step forward,” says Julian Strutt, director, property and real estate, at Charles Taylor. He points out that in the past, information about the construction of buildings was often lost as those buildings changed hands, or when further renovation works took place.

“The opportunity to gather that information and to identify risk helps not only the insurer, but also gives the leaseholder more confidence about the building they are living in,” he says.

Leaseholders will also benefit from the FCA’s ruling in September 2023 that insurers must act in leaseholders’ best interests, treating them as customers when designing insurance products. Insurers will be banned from recommending policies based on commission or remuneration and must provide much more transparency around policy details and pricing.

The ruling follows the FCA’s 2022 review of this market, which concluded (unsurprisingly) that leaseholders had experienced higher costs but received poor value in recent years. One reason for this was the practice of insurance brokers sharing commission with whoever was arranging buildings insurance policies, including property managing agents, landlords and freeholders.

In a statement responding to the ruling, ABI director of general insurance Mervyn Skeet agreed leaseholders “deserve greater transparency” around policies, but also asserted that “the ultimate solution to the problem is to remediate buildings to a standard that saves both lives and property and we urge government to progress this urgently”.

In late October the government announced it had agreed a pledge with five leading brokers that they would end the practice of sharing commissions with those placing or arranging buildings policies. The insurers also promised to put a 15 per cent cap on the proportion of a premium brokers take for arranging cover.

The ABI has also advocated other changes to help increase capacity and reduce insurance costs. They include the government providing cover for catastrophic losses to affected buildings above a certain amount; removing Insurance Premium Tax from policies for affected buildings; and more clarity on how information recorded on the Golden Thread for each building will be recorded and stored.

At BIBA, Blundell points out that net zero and sustainability issues are likely to become ever more prominent in future, forcing further adaptations of both regulation and of insurers’ practices and policies. For example, he notes the development of new, timber-based construction methods for tall buildings. “We need to anticipate what new risks could come down the pipe and be prepared to look at those,” he says.

“I think the industry wants to do the right thing,” Blundell continues. “The McGill risk sharing scheme should help in terms of bringing more capacity in at a more affordable price. This has historically been a competitive market for insurers and brokers and we should get back to that situation once buildings are being built to the right standards. We have good historical evidence that when a building is remediated and the fire safety issues are resolved, the cost of buildings insurance can be negotiated downwards by our members.”

There is some light at the end of the tunnel, it seems – but we still don’t know how long that tunnel is...

This article was published in the Q4 2023 issue of CIR Magazine.

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