Dear CEO | Release Date: 28th January 2022

To read a longer summary of this Dear CEO letter, click here.

To access the original FCA document, clear here.

Short Summary

The Financial Conduct Authority (FCA) has addressed the issue of rising insurance costs for multi-occupancy buildings affecting leaseholders significantly. The letter highlights concerns over financial difficulties for property owners, exacerbated by factors like unsafe cladding, which increases insurance risks and premiums. However, it notes that distribution costs also impact prices significantly.

The FCA expects insurance firms to ensure their pricing models are fair and accurately reflect the actual risks. It emphasises that although freehold property owners typically procure these policies, it is the leaseholders who often bear the cost through service charges without the ability to shop for better rates. Insurers and distributors are urged to consider both the freeholders and leaseholders’ needs, ensuring policies provide fair value.

Firms are instructed to reassess their pricing strategies to ensure they are justifiable and based on a reasonable risk assessment. The FCA is particularly concerned with the role of commissions in pricing structures, highlighting that these should not encourage practices that detract from the fair value offered to customers.

To tackle these issues, the FCA plans to gather data on firms’ pricing strategies for multi-occupancy buildings and examine the impact of non-risk related factors like commissions. This effort will help determine if further interventions are necessary to ensure fairness and value in the insurance market.

Key Take-away:

Insurers and intermediaries must ensure that their pricing strategies reflect genuine risks and costs, considering both the interests of freehold property owners and the financial implications for leaseholders. The FCA expects firms to comply with regulations ensuring fair value and is ready to intervene where necessary.