We hear so much about the cost of living ‘crisis’ and increases in intangibles, like insurance premiums, are perhaps the hardest to explain.
In the insurance market people often talk about “hikes” rather than “rises”, and leaseholders can feel like sitting ducks because paying their share of the buildings insurance premium will almost certainly be mandatory under the terms of their lease.
Property managers who manage blocks on behalf of clients, and the directors of Resident Management Companies or Right to Manage Companies, are likely to be first in the line of fire for questions about insurance premium increases – especially as buildings insurance is usually the highest cost on a service charge bill. So, if this is you, it’s probably worth preparing yourself for questions from leaseholders.
It’s probably reassuring to learn that the increases being seen are being experienced across most of the wider property market; it’s not just blocks of flats buildings insurance that is being affected.
Chances are, you probably already shop around for comparative quotes, or working with an insurance broker who does so for you.
And while you cannot escape global trends altogether, you can ensure that your policy reflects your individual blocks’ needs – and avoid paying for cover you don’t need.
First let’s get back to the original question: why are your buildings insurance premiums going up? There are two prime and distinct factors at work here: the cost of rebuilding or repairs and the increasing number of claims being made.
Rebuilding and repair costs
Insurers have to base premiums on calculations of the costs they might have to meet – their exposure.
To do this they refer to the Building Costs Information Service, which is provided by the Royal Institute of Chartered Surveyors (RICS) – it is as honest a measure as you are likely to find. This tells them what the Building Declared Value (BDV) should be, and premiums are indexed accordingly.
Do remember that the BDV is the value of the property, the bricks and mortar, everything that’s fixed to the property, including fitted kitchens and bathrooms on the day the policy starts.
It doesn’t take into consideration the value of the land or the desirability of the property, something you may need to explain to people on occasions when they feel the BDV is low.
To complicate matters, they may also then wonder why the Building Sum Insured (BSI) is higher. To understand more about the difference between BDV and BSI click here.
This is not simply a way to charge higher premiums but is protection against inflation for the policyholder to keep up with price inflation as the year passes.
The supply chain crisis of 2021 has led to price increases in many building materials and labour due to shortages, so the difference over the course of a whole policy year is especially marked at the moment.
How big an issue is it? Based on the average peak rebuilding costs increases in we saw in 2021, Deacon calculates that a block that would have cost £500,000 to rebuild in 2020 would have run up bills of £544,000 in 2021.
Remember, this isn’t just an issue if the building is a total write off: every small claim would be affected in proportion if you are underinsured because your policy may not have taken into account the increase in rebuilding and repair costs.
Increasing number of claims
And insurers tell us the market is hardening, which means that not only premiums are increasing but also some insurers are less willing to take on some risks.
They can see that both the frequency and size of claims has been increasing. Some are deciding not to ensure some blocks of flats at all, while others are more selective. We can all see that premiums are rising.
That doesn’t mean you are completely at the mercy of the providers – there are things you can be aware of to try and minimise future increases.
What can you do?
You cannot influence global issues, but some block management issues can be influenced.
Start by ensuring the block is insured for the right amount by checking the Buildings Declared Value (BDV).
Insurers will often index link the BDV originally declared and if that was wrong to start with, then the actual amount the building is insured for can get progressively wider and wider of the mark.
Even if the insurer hasn’t asked, consider commissioning a revaluation to keep yourself on track and ensure your building is not exposed to the financial risks of being underinsured.
Endeavour to be more attractive to insurers by managing risk and reducing claims. Claims history, as we all know, has a major influence on premiums.
In our experience water damage still remains the most common cause of insurance claims. You simply cannot remind people too often about the importance of basic maintenance checks and precautions. And remind them that repeated claims inevitably have a direct effect on how much they pay for insurance – and leak and overflow prevention should be relatively easy to improve on.
Increasing the block excess may help bring the premium down but bear in mind this is the amount you’ll have to pay if you make a claim.
Lower excess, higher premium or higher excess, lower premium? You can discuss the options with your fellow leaseholders or insurance broker, but bear in mind that sometimes insurers will take the decision out of your hands – particularly if there is a claims history that concerns them.
If the policy has a higher excesses, leaseholders need to remember that the cost of smaller repairs and making good will probably be coming out of the service charge budget: is that practicable for your customers?
Next 12 months?
We don’t have a crystal ball or know how prices will rise or fall next year. All we do know is that insurers appreciate the relatively light claims history that is the mark of a well-managed block.
The sole purpose of this article is to provide guidance on the issues covered. This article is not intended to give legal advice, and, accordingly, it should not be relied upon. It should not be regarded as a comprehensive statement of the law and/or market practice in this area. We make no claims as to the completeness or accuracy of the information contained herein or in the links which were live at the date of publication. You should not act upon (or should refrain from acting upon) information in this publication without first seeking specific legal and/or specialist advice. Arthur J. Gallagher Insurance Brokers Limited trading as Deacon accepts no liability for any inaccuracy, omission or mistake in this publication, nor will we be responsible for any loss which may be suffered as a result of any person relying on the information contained herein.
Deacon is a trading name of Arthur J. Gallagher Insurance Brokers Limited, which is authorised and regulated by the Financial Conduct Authority. Registered Office: Spectrum Building, 7th Floor, 55 Blythswood Street, Glasgow, G2 7AT. Registered in Scotland. Company Number: SC108909