Few issues have brought public and regulatory scrutiny to bear on the insurance sector quite like the cost of insurance for high rise, cladded buildings following the Grenfell fire.
Everyone from the FCA and Government ministers to lobby groups and individual leaseholders have questioned the reason behind rising premiums, with reports of up to 1000% increases hitting the headlines.
But with the launch of Association of British Insurers’ Fire Safety Reinsurance Scheme - backed by Allianz, Aviva, AXA, RSA and Zurich - financial relief appears to finally be on the horizon for thousands of leaseholders who have been hit with increased insurance costs.
The scheme uses a consortium of reinsurers, led by Swiss Re, to remove the need for ‘layered’ insurance for all but the largest blocks, where the primary insurer takes a lead position on the risk but further layers of insurance are required to provide full coverage.
During the height of the cladding crisis, when the scale of the potential issue was realised, market capacity retreated at an alarming rate. As the true cost of a total loss became apparent in portfolios across the market, insurers had to restrict the capacity they could deploy on any one risk.
“In general, large composite insurers did what they could to support existing customers” says Matt Briggs, UK Technical Director of Commercial Property Underwriting at AXA Commercial.
“It was the excess of loss specialist markets that inflated prices. For example, we would write a £30m initial limit and the customer would have to buy the rest of their cover on top. The excess of loss markets were writing their layer for double what we were charging at the base level. When you consider that most of the claims would come in at the base level we were writing, that felt opportunistic."
Matt says that as insurers became aware of the problem, some completely withdrew their capacity while others, like AXA, continued to provide cover to existing customers but at increased premiums to reflect the increased risk exposure. With underwriting pens restricted by solvency rules, the primary market needed support to complete coverage and that is where some players came in and took advantage, resulting in eye-watering premiums for many.
“The reinsurance facility has largely fixed the problem for us as we can now write 100% up to £50m with reinsurance support. The scheme has enabled us to deploy more capacity and fill in capacity at cheaper rates,” Matt explains.
“We have mitigated our own exposure while giving customers access to a proper market.”
While the Grenfell fire is often pointed to as the cause of the market malaise, it was actually only the trigger for a slow build-up of issues over a period of years. Grenfell may have been the tipping point but the issues around the use of flammable building materials and designs had been growing for some time, as the use of polystyrene and polyurethane render and aluminium cladding became more commonplace around the turn of the century.
Of course, insurers weren’t blind to the use of these materials but with a persistent soft market, where even the slightest price increase could see an underwriter lose out on a property risk, the incentive in the shape of costly fire claims just wasn’t there to encourage a deeper dive into the true nature of the risk.
There was a growing unease in the market and while Grenfell certainly accelerated the technical work required to gain a better understanding, it wasn’t until lenders started insisting upon an EWS1 certificate before issuing a mortgage, that the panic really started to spread.
“Everyone rushed out to get an EWS1 to secure their mortgage and these forms started finding their way to underwriters,” says Andrew Coulson, Director at specialist broking firm, St Giles.
“Your average underwriter, who understood there was a wider a problem and was under pressure internally to address the risk exposure, suddenly realised they had a lot more of these buildings on their book than they thought.
“A lot of them headed for the hills,” he adds.
The immediate fallout was that cover of any kind was incredibly hard to find for at least six months after the introduction of the EWS1 process in 2019, and this lasted throughout 2020. But once the dust started to settle and insurers began to get to grips with their exposure, the sudden and often violent premium increases started to work their way through the market, creating a very difficult situation for both brokers and insurers, as Andrew explains.
“Underwriters say ‘this EWS1 form says there is flammable material on this building and technically if there is a fire, we could lose all of it’. They are bound by solvency rules to price it properly and commercially and it’s hard to argue with their position,” he concedes.
“But clients were suffering huge premium increases, insurers were taking hundreds of thousands of pounds in premiums and everyone was asking where the fires were? That was the dynamic between the two camps,” he reveals.
This state of affairs was clearly untenable and with pressure bearing down from all sides, something had to be done.
“Paul Dilley (now Chief Underwriting Officer at Bridgehaven Insurance but at RSA at the time) and I got together quite early on to theorise a few different structures that could bring a solution and we took some of our recommendations to the ABI committee,” says David Ovenden, Chief Underwriting Officer at AXA Commercial.
Once at the committee stage, brokers started to get involved with McGill and Partners quickly emerging as the best placed to pull together a workable reinsurance scheme. And 18 months of negotiations later, they delivered.
“There are a range of outcomes, all of which are positive,” says David, who lives in a block of flats with flammable cladding.
“Every customer who needed the excess cover and had an AXA lead, will save money - between 25% for better risks but up to 66% for the most challenging. “The scheme also brings more transparency to the underwriting process. We used a technical rather than a commercial approach and if I dropped all the cases we have underwritten on the floor and every leaseholder picked up a different case, they would recognise the methodology and approach we have used. We haven’t charged what we could get away with – it’s always been risk reflective pricing,” he says.
The scheme also eases pressure in the market as, with the solvency restrictions on insurer capacity lifted, there’s more to go around meaning insurers, including AXA, are once again open to new business.
But David is quick to point out that as good as the scheme is, it doesn’t answer every question posed of the insurance sector. If the buildings being insured aren’t adequately remediated, the problem will just reappear down the line.
“After the scheme ends, buildings that haven’t had the combustible material removed will just stay about 50-100% higher compared to if they were properly resilient,” says David.
Remediation is at the heart of the success of the scheme as without it, premiums will stay high beyond the three-to-five-year limit of the scheme. Leaseholders can apply to access the Government’s Building Safety Fund to remediate their building, but it only applies to buildings over 17.7m.
In some situations, the original developer is remediating the building and we have been working with our customers to help them understand the difference between remediation to a ‘life safety’ standard and remediating the building to be more resilient to fire. We have been advocating for building standards that are resilient, mitigating the risk of significant fires and saving lives.
In addition, the scheme is structured in such a way that the value of the building has a significant impact on whether the scheme benefits a customer or not.
“With a building worth £75m, we can now go to AXA and they can take 100% of the risk on AXA paper. By applying the rate for the first £50m to the whole £75m, McGill remove the need for those excess layers. You are suddenly getting a £300,000 premium rather than £450,000 one,” explains Andrew.
“But for buildings valued at under £50m, there’s no real change. You are still paying the higher prices. Take a 1960s purpose-built block - if the premium rate is 10p for every £100 of value and you’ve got £50m declared value, you will pay £50,000 in premium.
“If you have the same size block but it’s wrapped in polystyrene, you might be paying a 40p rate, or £200,000 in underlying premium. Were you in the same block with a £100m valuation, you would be proportionally better off,” he adds.
As these properties are remediated, more of these ‘bad’ risks will fall back into the wider portfolios, now backed by a deeper understanding of the risk, something that was distinctly lacking at the outset of the crisis. But as the scheme is comprised of a number of individual contracts between insurers and reinsurers, albeit led by Swiss Re, there is a risk that some providers may pull out if the going gets tough again.
“The reinsurance contracts that make up the scheme are renewed every year, so the next 12-18 months are crucial,” says Matt.
“I think we’ll be okay for the first couple of years, but we need to keep everything together. I think the reputational damage is too much of a risk if reinsurers withdraw. It has been a good outcome for customers.”
Serious questions were asked of the insurance sector and, while it took 18 months, the industry delivered. It has shown that its constituent markets can come together to agree an approach that not only protects balance sheets but more importantly, allows thousands of people up and down the country to get on with their lives.
“I’m proud of the way we behaved. We didn’t leave a single customer without cover, and we certainly didn’t price gouge. I will look back at this in the future and think that while it was a very challenging time, we can be proud of what we’ve done,” says David.
