The shift towards leaseholders exercising their Right to Manage is slowly having an impact on this sector of the property market and resulting in greater scrutiny of the value it provides
Insuring blocks of flats poses challenges, with modern methods of construction and the trend towards leaseholders and tenants exercising their Right to Manage their buildings key among those that have crossed brokers’ and underwriters’ desks in recent years.
The shift towards leaseholders exercising their Right to Manage – granted under the 2002 Commonhold and Leasehold Reform Act – has been very gradual according to Simon Allison, a specialist property barrister from the Hardwicke chambers.
“It has taken the property managers a while to catch up with regulatory changes,” he says. “There has been a steady flow of legislation and regulation over the last 20 years but some parts of the market have only recently experienced the full impact. For instance, Right to Manage under the Act was enacted in 2004 but was ignored for a while. Then, after 2009 it started to pick up.”
As the economic recession started to bite, many leaseholders looked at the management charges for their blocks – including insurance – and started to ask whether they could not get a cheaper service by managing their blocks themselves. Insurance can feature prominently in the attack on excessive charges, especially if the freeholder is also the managing agent and has placed the insurance as part of a much larger property portfolio, says Robin Gleeson, business director for Towergate’s Hemel Hempstead insurance brokers’ division.
“When freeholders are still actively involved they often control the insurance and can almost charge what they like,” he says. “It can end up being the main recurring cost on a block of flats. In those cases managing agents are often encouraging people to go down the Right to Manage route and that’s when they come to us or a broker.”
Insurance costs may form part of an application to take over control of a block but it is rarely the overriding factor because the tribunals that make the decisions have set the bar high, says Allison: “To challenge the insurance costs you need to show that they are out of kilter with the market. It is not just a question of showing it is available cheaper. Often there is a real lack of understanding among tenants and leaseholders about what they have to do to successfully challenge on the grounds of insurance costs.”
Luke Boobyer, business delivery manager – property investors at Endsleigh Insurance, says freeholders especially have come under a lot of pressure in recent years: “There is rightly now a healthy dose of cynicism about some of the block managing agents and especially freeholders. There have been quite high commissions in this market and in the past a lot of pressure to rebate premiums. However, I can’t remember the last time I had a conversation with a freeholder about rebating some of the premium. Some 10 years ago, even five years ago, those conversations were common.”
Allison says this shift has a lot to do with the pressure from the tribunals: “It is really quite unusual nowadays because of the growing awareness on the part of tenants and leaseholders. Also the tribunals are much more aware and will order disclosure of all commissions if they are concerned about the insurance arrangements.”
Cause for concern
This does not mean that underwriters are sanguine about the market and the practices of some managing agents. Boobyer says his biggest worry now is that some managing agents that place insurance, especially those still acting for freeholders, are not authorised to do so: “They need to be authorised to arrange insurance, especially on behalf of a freeholder but some are still not regulated. In those cases it tells you something about the management company and their ethics.”
David Williams, technical director at Axa, says the market may have got better but still has some causes for concern. “The vast majority of this business is still placed via managing agents. The less scrupulous firms that ripped people off are not around anymore and those that are around have to provide a more just and fairly priced service, especially when they are appointed by the leaseholders themselves.
“However, there are still some very high commissions paid in property owners’ cover. We are surprised that it hasn’t come under the regulatory spotlight yet.” Those commissions can still hit the 30% mark, although 15% to 20% is more usual nowadays.
Williams said that it was probably concerns about commission and the lack of transparency when it comes to insurance that leads some Right to Manage groups to try and do everything themselves rather than appoint their own managing agents. These are not always the easiest people to deal with: “Those RTMs sometimes have difficulty agreeing among themselves. The tenants’ boards can be argumentative as they are made up of the sort of people who tend to be more forthright and argumentative.”
This can lead to problems collecting insurance premiums from leaseholders and tenants, something Axa has seen, says Williams: “When that happens we stand back. They need to sort it out because our contract is with the board and not with the individual tenants.”
Gleeson agrees such problems are not uncommon: “They think the grass is greener on the other side. They get control, sack the managing agent but within a year have appointed their own managing agent because they realise it is more complex than they thought. That said, there are some success stories out there.”
Associations taking control
Despite these problems this is a growth area and one that is making a market where premiums which have been flat for some years are even more competitive, says Pete Wallace, senior trading underwriter at RSA: “We predict a continued increase in the number of Right to Manage and residents associations trying to take control of the management and placement of their insurances.
“We are already seeing brokers who are actively trying to target this market. As a result there will be more and more of these block policies placed by managing agents being marketed. Also, individual risks will be separated out and marketed individually. This will potentially drive more pricing pressure on insurers and create an even more competitive marketplace.”
Flat premiums have generally been matched by flat claims over the last few years, he adds.
“Claims frequency across our block of flats account has stayed relatively static over the last five years with spikes for large weather related events, for instance, the recent flooding, very low temperatures a few years ago and large storm events,” he says. “The most common claims are escape of water and always have been.”
High water costs
Escape of water can be complex and quickly lead to some very high costs, especially if loss of rent and alternative accommodation costs are piled on top of the remedial works.
A single water leak can affect many properties at the same time, says Leigh Fordham, major and complex loss specialist at Cunningham Lyndsey: “In a recent loss we’re working on, upwards of 15 properties have been affected. Although it was first assumed by the policyholder to be a single leak, when exploratory works were undertaken, it was revealed that there had actually been several leaks. In these cases what might at first seem like a four-figure loss can quickly escalate to hundreds of thousands of pounds requiring extensive strip outs and months of remedial work.”
Williams says all insurers have seen more claims from escape of water, some of which are due to poor workmanship in new build blocks: “As plastic piping became more popular there was a high incidence of it not being fitted properly. We got to know that certain years of construction were bad.
“If we see a property we are worried about or which has a poor claims history we will insist on better leak detection being installed together with automatic cut-off as a pre-condition of insuring the block.”
There are other potential problems says Boobyer: “Excesses have definitely increased over the years, especially with escape of water claims, and can typically be over £1000. This can catch people out sometimes. Also, we see situations where leaseholders have sub-let and then their loss of rent and the cost of providing their tenant with alternative accommodation might not be covered. These are areas which brokers should be talking to people about.
“Sometimes the full RTMs have a better chance of getting good advice and the best deal because they are dealing with them direct and not through a managing agent.”
The flood threat
All property underwriters in the UK have flooding looming large on their radars and those with blocks of flats in their portfolios are no exception. Many new builds are on or near flood plains and these are top of the list of concerns, says David Williams, technical director at Axa.
“We don’t think properties should be built on or near flood plains and we will avoid writing them where we can unless a lot of attention has been paid to resilience. Then we will want to survey the property and fully understand the risk.”
Luke Boobyer, business delivery manager – property investors at Endsleigh Insurance, said he often sees insurers paying for flood surveys: “With the larger policies insurers are usually keen to help.”
According to Robin Gleeson, business director for Towergate’s Hemel Hempstead insurance brokers’ division, finding flood cover for blocks of flats is not an issue at the moment: “Where flats have been built in flood-prone areas we are seeing a lot more thought being given to resilience. For instance, ground floor car parks are becoming a lot more common.”
Williams says that was the sort of approach to resilience insurers welcomed: “Giving the ground floor over to car parking is a good example of where the developers are working with the water rather than against it. If that is taken into account we will write it.”
New construction methods
The other significant change in the market alongside the emergence of Right to Manage has been the change in construction methods, which often pushes up premiums, says Boobyer.
“New construction methods are often seen as a problem by insurers,” he says. “They are usually concerned because it is unproven as a risk, not because there is a particular problem with claims. If an underwriter is concerned about something you can assume the price will go up. Their understanding lags behind the pace of change in construction methods.”
Gleeson does not think this is all the fault of insurers: “Developers aren’t always talking to insurers. For instance, insurers worry that the new sleek-looking fascias might prove to be combustible so premiums increase until insurers find out more about them.”
Some changes in construction are already having an impact, says Boobyer, citing
pre-fabricated construction as an example: “It needs specialist contractors to come in and replace a whole unit. That has implications for increased time and loss of rent so the tail of the claim is exacerbated.”
One claims challenge that has not reared its very expensive head for a long time is subsidence. Underpinning blocks of flats is a major engineering enterprise as well as a significant challenge in managing policyholder expectations as work can often last for months. You can hear the relief in the voices of underwriters and claims managers when you mention subsidence: “We keep an eye on this, we’ve been very fortunate as we haven’t had an event year for over a decade,” says Williams.
These may be on the whole pretty solid buildings but underneath it all, covering blocks of flats is not without its challenges, both technical and regulatory.
When escaping water meets new construction methods
Escape of water is the biggest consistent source of claims and dealing with them is getting more complex as construction methods change, says Leigh Fordham, major and complex loss specialist at Cunningham Lyndsey: “Modern methods of construction go by the maxim that out of sight is out of mind. But while this can help to achieve the sleek, minimalist lines seen in property magazines, hiding away plumbing installations can make it difficult to ascertain the scale of water leaks on first inspection.”
Particular construction methods can create problems with escape of water:
• Plumbing installations concealed from view in service ducts or voids that are often difficult to access
• Raised floors comprising a concrete slab overlaid with joists or cradles and then a timber finish, creating a floor void that is often filled with insulation
• Internal partitions that bear off the raised floor.
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