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Dear CEO | Release Date: 28th January 2022

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

To access the original FCA document, clear here.

Long Summary

This communication from the Financial Conduct Authority (FCA) outlines concerns and regulatory expectations regarding the rising insurance costs affecting multi-occupancy buildings, particularly impacting residential leaseholders. The letter highlights the financial strains placed on leaseholders due to increased insurance premiums, partly due to risk factors such as unsafe cladding but also exacerbated by distribution costs and commission structures. The FCA sets forth expectations for fair treatment and value, outlines its ongoing and upcoming regulatory efforts, and details the responsibilities of insurers and distributors in ensuring fair pricing strategies that reflect true risk assessments and costs.

The rising cost of building insurance, especially in apartment blocks and other multi-occupancy settings, has led to significant financial challenges for leaseholders. These challenges are recognised as potential indicators of vulnerability, prompting the FCA to reiterate its expectations for fair treatment by insurance firms. The letter reflects the FCA’s commitment to proactive oversight in a market facing scrutiny from parliamentarians, consumer groups, and the public.

Insurance Pricing Concerns

The FCA acknowledges the complex factors contributing to rising insurance costs, including inherent risks like unsafe cladding. However, it emphasises that other elements, such as operational and distribution costs, significantly influence pricing. The concern is that these factors may not always equitably reflect the risks or benefits provided, leading to prices that do not offer fair value to the end consumers—primarily the leaseholders.

Regulatory Expectations for Fair Value and Customer Treatment

Fair Value

Insurers are reminded of their duty to ensure that their pricing models are justifiable and proportionate to the risks and benefits involved. The FCA expects insurers to conduct regular reviews of their pricing strategies to confirm that they remain aligned with the principle of fair value. This includes a balanced consideration of risk assessments and the associated costs of providing the insurance products.

Responsibilities of Distributors

Distributors, including brokers and property managers, must avoid actions that compromise the delivery of fair value. The FCA specifically criticises commission structures that do not correspond to the actual costs or benefits involved in the insurance provision. Commissions based on a percentage of premiums, which may become unreasonably high as premiums increase, are under scrutiny.

Consideration of Leaseholders’ Interests

The letter stresses that while freehold property owners typically are the direct customers of insurance firms, the real burden of insurance costs falls on leaseholders. Therefore, insurers and distributors need to account for the interests and rights of leaseholders, who, despite not being the direct customers, bear the financial implications and should benefit from fair and transparent pricing.

FCA’s Actions and Support

The FCA outlines several measures it is taking to address these issues:

Data Collection: The FCA plans to gather data to better understand how fire hazards and other factors are influencing insurance pricing for multi-occupancy buildings.

Industry Engagement: There will be active discussions with firms about their pricing strategies to ensure they are compliant with regulatory standards for fair value.

Review of Non-Risk Price Elements: The impact of commissions and other distribution costs will be evaluated to determine if further regulatory interventions are necessary.

Conclusion and Next Steps

Insurers and brokers are expected to review their product offerings immediately to ensure they align with the new regulations that demand fair value. The FCA is positioned to use its regulatory powers to enforce compliance where necessary. This ongoing focus is part of the FCA’s broader strategy to ensure that insurance markets function in a way that treats customers fairly and transparently, particularly in sectors where pricing complexity and external factors such as building safety risks can lead to significant consumer detriment.

Key Takeaways and Actions

Immediate Product Review: Firms must assess their current insurance products to ensure they provide fair value.

Compliance with Commission Guidance: Reevaluate commission structures to ensure they are justified by the actual costs and benefits of the insurance services provided.

Engagement with FCA Initiatives: Participate in FCA’s data collection efforts and industry discussions to contribute to a more accurate understanding of pricing dynamics in the sector.

Prepare for Regulatory Changes: Stay informed about potential regulatory changes resulting from the FCA’s review of the non-risk elements of pricing.

This letter serves as both a directive and a warning to firms, reinforcing the FCA’s commitment to protecting consumers and ensuring fair market practices in the insurance industry, with a particular focus on the challenges faced by leaseholders in multi-occupancy buildings.

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