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 they are left with no choice 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 to be asked questions about insurance premium increases – especially as buildings insurance is more often than not the highest cost on a service charge bill.
It doesn’t help with costs but it may be reassuring to learn that the increases being seen are being experienced across most of the wider property market. It’s not just affecting blocks of flats buildings insurance.
But let’s get back to the original question: why are buildings insurance premiums going up? There are two main 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 if they feel the BDV is low.
To complicate matters, they may also then wonder why the Building Sum Insured (BSI) is higher. 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, we calculate 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. Ask yourself if now might be the time to get a revaluation to ensure your building is not exposed to the financial risks of being underinsured?
And endeavour to be more attractive to insurers by managing risk and reducing claims. Claims history 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.
Excesses
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? 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.
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.
Mark Savage is Business Manager at Gallagher’s blocks of flats specialists based in Bournemouth.
* Deacon has rebranded to Gallagher.
