In conversation: Biba’s White and Trudgill on broker leasehold commissions

The FCA report into 16 brokers, published on 21 April, proved to be a damning insight into some of the practices and shortcomings of brokers in the multi-occupancy buildings space.

It found that in less than four years, insurance premiums for multi-occupancy buildings had increased, and the overall level of remuneration and commission being paid to brokers had risen substantially.

However, speaking exclusively to Insurance Post, White (right), and Trudgill came to the defence of brokers, while at the same time issuing a warning to those letting the side down.

Broker commissions to third-party firms

The FCA’s report found that, for the 16 brokers in the review period, about £80m of broker commissions were issued to third-party firms, often the freeholder or a property managing agent.

These findings come after a tribunal revealed that Reich Insurance Brokers paid £1.6m of its commissions to a third-party firm over a 10-year period for the Canary Riverside estate.

In his letter to the FCA, Gove said the findings of the report had strengthened his resolve to “ban property managing agents, landlords and freeholders taking commissions and other payments when they take out buildings insurance, replacing such payments with more transparent fees”.

In a letter back to Gove, White and Trudgill appeared to agree with the idea to stamp out this practice, even urging the government to “bring forward the legislation to enact this as soon as possible to create a level playing field and avoid an early movers penalty”.

But this one of the few instances where Gove and Biba were in agreement.

Buildings are safer, but the risks are still complicated

In his letter to the FCA, Gove explained how the risk in multi-occupancy buildings decreased, yet the insurance premiums paid by leaseholders had increased over the past few years.

He said he expects insurers’ pricing to “reflect that reduction in risk” and would “welcome a proposal from the FCA on how to guarantee the market is operating effectively in this respect, and to expose any who fail to meet our expectations”.

In his response to Gove, White said a main focus for Biba has been to reduce the risk profile of these buildings, but other factors have come into play.

“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,” he said.

“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.”

It used to be the case that a single insurer would offer insurance for the entire building. But right now, since Grenfell, insurers understand that the whole building could be lost, not just two floors. They don't want to have that maximum possible loss, so they reduce that cover to only insure part of the loss.

Graeme Trudgill

Speaking to Post, Trudgill said that while new builds do have much better risk profiles, it is the buildings that have yet to be remediated that still pushes the hard market.

“Once a building has been remediated, for example the cladding comes off, it becomes a lot simpler [to place insurance]. But having said that, we're still in a hard market from where a lot of properties haven't been remediated.”

However, Trudgill said the way these risks are priced has changed, and that insurers are now pricing for a total loss rather than a partial loss, and some insurers are refusing to cover a building at all, hence the increase in premiums.

“It used to be the case that a single insurer would offer insurance for the entire building. But right now, since Grenfell, insurers understand that the whole building could be lost, not just two floors. They don't want to have that maximum possible loss, so they reduce that cover to only insure part of the loss."

This, he said, created more work for the broker.

“The broker then has to go out and insure the rest of the building by going to the reinsurance market, which is far more complex, far more onerous, workwise and time consuming. And that's why we are saying they are complex risks.”

This resulted in the first of six points of action Biba already submitted to the government: 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.

“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,” White said in his letter.

Fair value assessments

The overarching theme of the report was: “Is the broker and insurer providing fair value for the customer?”

After asking the 16 brokers to give evidence of the fair value they were providing, the FCA appeared disappointed at the return it received on this part of the survey.

In the report, the FCA said: “Most of the brokers in our sample did not give us adequate evidence to show that they deliver fair value consistently for multi-occupancy buildings products. This is due to a range of factors including deficiencies in their product value assessment work, shortcomings in their recording and analysis of their own costs and insufficient scrutiny of the commissions they pay to others.”

However, Trudgill jumped to the defence of brokers, saying how fair value assessments are a “new requirement” that brokers haven't quite got the hang of yet.

He said: “In the 355-year history of the insurance industry, this is something new. Members have submitted it. Obviously, it is not claiming fair value sufficiently according to the regulator's interpretation.”

In its manifesto launched this year, Biba said the roll out of fair value assessments has proven to be “one of the most problematic and resource-intensive tasks the insurance broking sector has ever had to put into practice”.

It called for the FCA to adjust the scope of the regulation so that FVAs are only required for non-advised sales.

White also said in the letter to Gove that the FVA implementation was delayed for reasons “outside of brokers’ control”.

Trudgill said that the FCA gave brokers and distributors a three month extension to submit their FVAs for insurer products after it became apparent that a significant amount of insurers were carrying out their FVAs “too close to the deadline”.

For White and Trudgill, the problem with the FCA report is not that brokers aren’t providing fair value to customers, but instead lies with brokers’ ability to show the regulator it is providing fair value.

Trudgill said: “The FCA didn't find that brokers weren't giving fair value. What they found was a broker isn't good at giving evidence that they'd been through a process to determine that they were giving fair value. That's the bit that brokers need to work on.”

He and White said Biba has a piece of work in the pipeline to help brokers better explain their value.

Trudgill said: “As a trade body, it's our job to help support the members when new things come along. So, we are commissioning a new piece of work that will help the members deliver, what we understand, the FCA want them to show.”

In the letter to Gove, White 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.”

Commission caps?

But are brokers and insurers offering fair value? Or are they not able to show they are providing fair value simply because they aren’t?

According to the report, average gross written premium per policy rose by 56% from £7470 in 2019 to £11,625 in 2022. Over the same period, average broker remuneration per policy rose by 39% from £2170 to £3010 and average broker commission per policy rose by 46% from £1785 to £2595. The increase in average broker commission accounts for 20% of the increase in average GWP.

In real terms, brokers are receiving less of a proportion of the premium, but still receiving more in terms of cash in the pocket.

The FCA said in its report: “In most cases, in the observations we received and used for our analysis, the commission rate was at least 30% (they ranged from <10% to 62%).”

Also, Post saw an email exchange where the commission rate was quoted at 50%.

This led to talk of commission caps being introduced for brokers, but White and Trudgill don’t want to see that happen.

Trudgill said: “I don't think anyone wants to have an arbitrary percentage cap. What we want to ensure is that any commission earned represents fair value. That is the key to all of this.

“And then we have fluctuating markets, so commission rates will need to be adaptable, depending on the market conditions. So for us, the FCA approach of fair value is the right one.”

But after Gove encouraged enforcement action and further restrictions in the future, Trudgill said it passes on any threats from the regulator, and take them all very seriously.

“We pass on all the messages from the regulator and DLUHC to our members,” he said. “We've made it very clear to them that the threats in the Michael Gove letter are to be taken really seriously.

“Yes, of course, we have impressed upon our members that all along that there has been a threat to ban or cap commission. But here we are today and commission is still there.

“So as difficult as the rhetoric has been, I think we're still in a good, healthy place. We think it's really important to preserve commission. It means a client can get all sorts of quotations and advice and information without spending too much because the commission model allows for that. So we think any move to ban commission would be wrong, but we do agree that members will need to evidence fair value in in what they do.”

Moving forward

Trudgill said he doesn’t feel there will be any issues going forward. But, that the FCA has been very clear on how it wants to clamp down on bad practice.

“What we've got coming out of the FCA and government is so strong. Everybody is very alert to the issues. The FCA have said very clearly that they're going to enforce it,” he said.

But White said in his letter that moving forward, if the government listens to Biba's six point plan, the customer will see more benefit.

"I believe it creates a great pathway forward to demonstrate how our members are doing their very best to help these clients. And we'll deliver on that in the future."