BIBA responds to Michael Gove's call for an end to 'inflated' broker commissions

The British Insurance Brokers’ Association’s (BIBA) CEO Steve White has responded to Michael Gove (MP, Secretary of State for Levelling Up, Housing & Communities) letter dated 17 April 2023 in which the Minister requested BIBA’s proposals for addressing insurance broker remuneration for buildings insurance in multiple-occupancy residential buildings.

Transcript of Steve White’s letter (25 April 2023):

The Rt Hon Michael Gove MP - Secretary of State for Levelling Up, Housing & Communities

Dear Secretary of State

RE:Broker remuneration for buildings insurance in multiple-occupancy residential buildings

We acknowledge receipt your letter dated 19th April 2023.

We have read through the FCA’s report and accompanying consultation paper and have issued a statement laying out our views, actions, and commitments. This is attached for your information.

As your department will no doubt have informed you, we have been actively working with DLUHC and our members on the insurance problems that stem from high rise multi-occupancy residential buildings for over three years. This features prominently in our 2023 manifesto, which was kindly launched at Westminster by the Economic Secretary to the Treasury in January. The following link will take you straight to the pages of our manifesto covering this topic CLICK HERE

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 ABI to finalise this new facility by the summer.

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, whilst 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. 2 Our members tell us that 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. 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.

The reported margin over and above staff costs directly associated with the placement and servicing of multi[1]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.

That said, we agree with the FCA that the remedy lies in our members evidencing fair value in a more robust and consistent way, and we will work with our 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. We will issue guidance on what good practice looks like, drawing on the examples of better practice observed by the FCA.

We also agree with the FCA’s point around better disclosure of information on insurance arrangements to leaseholders and will 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.

Finally, I would like to draw your attention to the linked issue of affordable and adequate professional indemnity insurance (PII) 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. 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.

In summary, our proposals include:

1. Implementing the reinsurance pooling arrangement with the ABI that aims to provide an answer to affordability and risk capacity for impaired multi-occupancy residential buildings.
2. Working with our members to implement the pledge in our manifesto around fair value.
3. Issuing guidance to BIBA members on good practice in the construction of fair value assessments.
4. Ensuring our members follow the new common code for the collection of data relative to multi-occupancy buildings.
5. Working constructively with the FCA on its new consultation to improve transparency and disclosure to leaseholders on their insurance arrangements, so that they are in a more informed position to challenge the cost and scope of cover including remuneration arrangements.
6. Continuing our discussions with government on how to solve the issue of the lack of affordable professional indemnity insurance to accelerate the remediation effort.

I would ask if you could find time in your diary within the next month for us to meet to discuss our detailed proposals, many of which have already been advised to your officials.

For your information we are meeting minister Rowley tomorrow afternoon on these matters. I look forward to hearing from you.

Yours sincerely,

Steve White

Chief Executive Officer