17
Examination of witnesses
Mervyn Skeet, Richard Smith and Matthew Jupp.
Q50 The Chair: Welcome to this meeting of the Built Environment Committee’s inquiry into modern methods of construction. Our witnesses today are: Mervyn Skeet, director of general insurance policy at the Association of British Insurers; Richard Smith, head of standards, innovation and research at the National House Building Council; and Matthew Jupp, who is principal of mortgage policy at UK Finance.
My name is Daniel Moylan and I chair the committee. I will not introduce other members of the committee now, but when they ask their questions. We all have nameplates in front of us, just in case you are wondering who we are. We are joined remotely by one of our committee members, Lady Cohen of Pimlico. You can see her on the screens around the room.
I would be grateful if members and witnesses could keep their questions and answers brief. As I have said before to witnesses, unless we are being very dense, it should not be necessary to repeat things a great deal, because there will be a full transcript of the evidence, and, unless we are being particularly stupid, it should not be necessary to give the same answer over and over. As we ask questions, unless we specify that they are for a particular individual, we are happy for you to decide among yourselves who answers the question, how many of you answer it and in what order, depending on what perspective you want to bring to bear on it. With that in mind, we are very grateful to you for the time that you are giving to us today. Our first question comes from Lord Berkeley.
Q51 Lord Berkeley: I want to ask you about assessing the risks of MMC. We have heard from different parts of the industry—your industries and many others—that you need more data on performance and longevity to look at the risks of MMC. Does this prevent you from approving a greater number of warranties, insurances or mortgages—the whole lot? If the building control people are happy with this under the current building regs, why do you need more data? I do not mind which of you starts. I would like to hear from all three of you, please.
Mervyn Skeet: I can start from the insurance perspective, if that is helpful. The insurance industry has hundreds of years of evidence on how to understand standard construction and how it reacts to various perils, such as fire, water, escape of water, floods, storm and subsidence. We do not have the same confidence, data or experience in these new materials, which is part of the issue.
To fully understand and write the cover for buildings using MMC—I will use that abbreviation, if that is okay—we need to understand the resilience and long-term durability of the products and the properties that would be built in that way, and how they would perform against the full range of insurable risks in comparison to traditional methods of construction. A lack of knowledge and evidence of how MMC buildings will perform against the insured perils I have just mentioned may mean that insurers look at loss estimates in a different way. They could be greater, because they do not have a full picture of how the construction would perform in certain areas.
We absolutely support the innovation of MMC. That is key. There is very much a competitive market of insurers out there currently offering insurance for buildings using MMC, but more data or information would be useful.
Richard Smith: One of our main concerns is risk of systemic failure, having a single failure that is common over multiple properties. The historical data of traditional builders helps us to manage that systemic risk. As Mervyn just mentioned, the durability aspect is really important. It is knowing that any newly constructed dwelling, whether by a traditional method or a modern method of construction, has the required durability that the homeowner or property occupier would expect to have. At NHBC, we do not differentiate between a traditionally built property and a modern method of construction or an innovative property. We just require evidence to demonstrate that the property will be durable for the life of the building.
Lord Berkeley: I hear what you say, but some of the MMC buildings have been around for some time. Some of the modern traditional buildings we might come across actually have very bad defects that we have heard about. Where do you get this data from, and who collates it?
Richard Smith: We have started to collate data based on the construction that we are dealing with at NHBC, but the proportions of modern methods of construction are quite low. The important thing is that we are expecting the same standard of construction for modern methods of construction: that is, we expect it to be to a standard and durable. Part of the historical issue is that there is sometimes a lack of standard or guidance with those kinds of products and materials.
Lord Berkeley: What about when it comes to lending money?
Matthew Jupp: Mortgage lenders as a whole are quite comfortable lending on properties built using modern methods of construction, provided that certain criteria are met. They want to make sure that it has longevity. Most of them would expect it to last for at least 60 years. They would want it to have insurance on normal terms and a good warranty backing it. They would want to make sure that it has long-term attractiveness and, if it needed to be sold again, that there would be a ready market for it. Lastly, they want to understand the lifetime costs and usage of the property and whether there is anything unusual about that from a homeowner perspective, whether there are certain things they need to do or cannot do to that property and whether there are attendant costs with that.
Having said that, they are generally quite comfortable lending on those properties. It just takes a bit more scrutiny. When we talk about data, we generally mean experience of mortgage lending. The more experience lenders have of these properties, the more willing they are to lend on them and to do so more quickly, easily and readily. When we talk about additional data, that is probably what we mean: just a better understanding of exactly what has been built.
Q52 Lord Berkeley: Getting all this data, how long is it going to take before you feel satisfied that the risks—because this is about risks, isn’t it—are no greater than a conventional build?
Matthew Jupp: From our perspective, mortgage lenders at the moment are quite comfortable lending on homes built by MMC. The scrutiny just takes them a bit more time so that they can understand exactly what they are lending on.
Richard Smith: At NHBC, we provide warranties on modern methods of construction too. The one thing that challenges us is the reparability costs of modern methods of construction. Is the repairability more of a challenge or not? If the building has a defect or is damaged, how is that repaired?
Q53 The Chair: Mr Skeet, in your reply you talked about new materials being used, but is that really the case? The materials used in modern methods of construction, even the volumetric and modular at the most advanced end of the scale, are materials we are generally familiar with. They tend to be steel, concrete, ceramic water closets and so forth. Is it materials, or is it method?
Mervyn Skeet: It is a mixture of both.
The Chair: What are the materials? I would like to know what new materials you think are being used.
Mervyn Skeet: There are concerns about materials in standard construction, so those materials would equally be a concern in modern methods. Maybe it was not simply about different materials. It is the way those materials are brought together. It is probably that. It is bringing together all the different pieces in one go.
Q54 The Chair: I understand that. I am really interested to know what it is that troubles you. If it is not really materials but method, what in particular concerns you about methods of construction? I have some ideas of how to answer this question, incidentally. I do not think it is a completely daft question, but, rather than supply the answers, I would rather hear yours.
Mervyn Skeet: On the basis that some of this construction would be modular, we would have concerns about making sure that there were the proper fire breaks in between the various parts of the modules, for example. The need for proper fire breaks is not just with MMC; it is equally applicable to existing methods of construction, standard methods of construction, or however you want to describe that. It is about making sure that the building is resilient when an event happens, whether it be escape of water or a fire—preventing a fire from spreading throughout the whole building, for example.
The Chair: Exactly—that would have been my answer if I had been answering my own question—and very understandable, but you can satisfy yourself on this through insulation. You need to know that the insulation is in place, and you can satisfy yourself on that by inspection. That is rather onerous from your point of view, I admit, but there are ways of substituting for inspection that are widely accepted—you accept guarantees from approved builders, set up schemes to do that and so on. Why is this fire break question still an issue, given that it could be addressed head on?
Mervyn Skeet: We have already seen it as an issue in standard construction, and it continues to be an issue there, notwithstanding the Building Safety Act. There still are issues out there with making sure that those fire breaks are correctly in place. Standards are still not necessarily being followed in the way they should be, and there are still concerns about how those regulations are being assessed.
The Chair: Is that worse in modern methods of construction?
Mervyn Skeet: It could be. I cannot say definitively that it is worse, but it could be because of the modular approach.
Q55 The Chair: Mr Smith, you made a very interesting point about systemic risk. Suddenly a curtain opened for me and I started to understand a bit. You take a new method of construction that involves a crucial role for, let us say cheeseburgers, and it works perfectly until it goes wrong. Then you discover that every house that has a cheeseburger component to it has to be demolished, and by now there are thousands of them. That is the sort of systemic risk you are talking about.
Richard Smith: Correct, yes.
Q56 The Chair: There is a scale of modern methods of construction, produced by the Government and a working party, that has seven points to it. At the top, it is volumetric and modular: build it, deliver it and bolt it together. Down from that you have what is panelisation, effectively—flat-pack stuff that is bolted together on‑site, a lot of which is based on timber. Do any of you have difficulties with timber-based construction, such as we saw on a visit recently to a construction site?
Richard Smith: We provide warranties on a large proportion of open‑panel timber frames. I think the category that you are referring to is category 2, which is closed-panel systems. The only challenge for us on closed-panel systems is that our traditional inspection method does not necessarily fit, because we cannot physically see the construction on-site. We have processes at NHBC to help us manage that. One of them is an assessment of the quality management processes to ensure that there is a consistent approach to production in the factory.
I see that panelised systems could be a growing area of construction over the next five to 10 years, especially with the future homes standard. There is a point in relation to fire, though, that is a bit of a challenge. There are specific fire tests in the industry. The timber frame industry may have referred to some generic testing historically, but there are more specific components in a closed‑panel system, so manufacturers may have to provide evidence on a case‑by‑case basis for those closed-panel systems to demonstrate compliance. That is the only difference.
The Chair: If these closed-panel systems are relatively new, which I think is fair to say, do not they represent a huge systemic risk to you as they roll out?
Richard Smith: I would say less so, because of the way they are built. They are predominantly a frame structure. We understand our risks with frame structures. I would argue that all a closed-panel system means is additional layers in the factory to build up the system and make it more complete. Typically, cladding systems are applied on-site. They can be applied in the factory, but the construction quality in a factory could be better and more consistent than on a site. The reality is that a closed-panel system, if the governance, quality control and application are correct, represents a similar risk to open-panel timber frame. It is just knowing that it can be physically inspected at one stage, whether by NHBC or by the process. It represents less of a systemic risk than volumetric, for example.
The Chair: As you can tell, I am trying to explore your attitudes to category 2 and category 1, because there is quite a cliff edge between them. You are all really quite comfortable with category 2. You are much cagier about category 1. I am trying to explore why that cliff edge exists, when I see a sort of continuum really, but maybe I am taking up too much time. No doubt we will have a chance to come back to it.
Q57 Lord Faulkner of Worcester: My question continues the same theme. You have confirmed to us what we have heard from other witnesses: that MMC is successfully assessed under the current regime. My question is how this could be done better. What would building regulations that were specific to MMC allow you to do that you cannot do now?
Mervyn Skeet: Whether it be MMC or standard construction, what is important for our members is that buildings perform to what we describe as a resilient building standard. Life safety is very important. It is very important that people can escape from a building, and life safety is what most regulations currently are focused on. We totally agree that that is 100 per cent important.
When you assess premiums, you wonder how the building will be damaged and what the cost will be of repairing that building, or, as the worst-case scenario, the cost of a building having to be demolished and rebuilt. It is that ability to withstand the fire, beyond everyone getting out of the building, so that the building does not completely burn to the ground and is therefore somewhat resilient. That is one of the biggest drivers for insurance premiums, because that is where the big loss will come.
That can apply equally to standard methods of construction or MMC. High-rise buildings are an obvious example to consider here. If there is a fire in an individual flat and it is contained to that flat, the cost of repairing and making sure that people can get back into their homes will be a lot smaller than if the whole building were to go. That is about making sure that regulations absolutely focus on life safety but also consider property resilience.
Lord Faulkner of Worcester: What about smoke damage? You have a fire in a particular flat, but it makes other flats uninhabitable because of the smoke.
Mervyn Skeet: Of course, that is also a risk. I am just using this as an example. Maybe it is not the whole building. Maybe it is the flats above and below it, or next to it on the same level, so it is not necessarily the whole building.
You make a good point, because there is a similar question with escape of water, or even just where the fire brigade is looking to extinguish a fire. If it is trying to extinguish a fire, it will use a lot of water by definition, and that water has to go somewhere. In an MMC, if it goes into cavities that are not correctly put together in the first place, or whatever, that could cause issues for the whole structure of the building. We have to think about it from the perspective of the overall perils of both fire and water damage.
Matthew Jupp: The mortgage lending industry does not have a set view of what could be done to improve building regulations. We do not have an ask in that area. We would hope that buildings that are built in the UK are safe and well built. If building regulations need to improve to do that, so be it, but we are not experts in how that can be achieved.
Lord Faulkner of Worcester: You are not looking to change or strengthen building regulations.
Matthew Jupp: We do not have a view on it, no.
Richard Smith: At NHBC, we act as a building control body. We are a building control provider. As I mentioned, one challenge that we have is measuring compliance against approved guidance. The regulations are the regulations, but the approved documents that support the regulations are focused predominantly on traditional construction. It is then about trying to ascertain what evidence is suitable in order to demonstrate compliance for that particular building. That often involves fire-engineered solutions and more complex solutions because of the lack of statutory guidance.
Q58 Lord Berkeley: Can I delve a little more deeply? We have had a number of debates in the Lords recently on lithium-ion batteries in vehicles, including scooters, and you will have seen quite a few bits of press about that. A ship sank off the Netherlands in the summer that was carrying a very full load of lithium-ion cars. From the reports, the frequency with which lithium-ion fires happen is unclear, but it is quite clear that, when they do happen, they are extremely dangerous. The London Fire Brigade was in the House of Commons yesterday telling people about that.
My worry would be that, if you have a property with more than one storey, with a garage underneath where people park their cars, and you are sleeping above, there is no way of putting these fires out. Water does not work. You just have to get out. Does that affect your assessment of the building regs with regard to, shall we say, the floor in between, if it is built like that, or any other part of the thing? Is the answer to say, “Don’t have a garage underneath a house”?
Richard Smith: That is measured for compliance with building regulations by test evidence. Typically, the requirement for a garage ceiling is a half-hour minimum fire resistance, so you contain the garage in the structure, if you like, from a fire point of view. That is in the guidance, and there is an approved test method for that, which is a fire test. If the construction is demonstrated to meet that test criteria, that would be deemed to comply with the building regulations. I am not aware of any additional testing at this stage for batteries, or any changes to British Standards on testing methods.
The Chair: We will move off British Standards for batteries very smartly, illuminating though Lord Berkeley’s question was. Thank you very much for that answer. In the interest of time and with every respect to Lord Berkeley, I am going to move to Lord Best, who will ask a question perhaps slightly more focused on modern methods of construction.
Q59 Lord Best: You are very reassuring about most of the categories of MMC and that we should not get too hung up about the problems of mortgages, insurance and NHBC warranties, except for category 1. I am beginning to think that this is where the problem lies. The Building Societies Association said to us, “Current lending policies typically do not support lending against volumetric category 1 construction and often result in lenders declining to lend on those properties, but more of our members will lend on other MMC systems”. That was about category 1, not about the other stuff. On mortgages also, the point was made to us that a 60-year life becomes a depreciating asset as time goes by. If category 1 really is 60 years and the other categories of MMC are as long as we are getting used to—I think a house has to last about 250 years nowadays—there is a distinction there.
I rather had the impression that, after these business failures, we were left with TopHat and practically no other major suppliers of category 1 volumetric MMC product, but in fact there are quite a few companies, and TopHat is only one of several. I have subsequently seen the evidence. Is this group the one that is affected, and should we concentrate our attention on the purer form of MMC that volumetric implies—doing the whole thing in a factory—rather than the other categories? Would we be right to see this as significant, as the BSA does? I do not think TopHat has obtained its NHBC accreditation yet, for example. That is because it does category 1. Is this really where the issue lies?
Matthew Jupp: I do not think the mortgage lending industry would have a specific issue with a particular category of MMC. I do not think it would have a set view on a whole suite of housing. There are potentially more issues with a type of property that does not meet some of the criteria that vendors have. It may have difficulty getting a warranty, for example, which would cause an issue in getting a mortgage. It may have difficulty getting insurance, which again would cause difficulty in getting a mortgage. Some of the other factors that play into a particular suite of housing may make it difficult. It could be lifetime costs and lifetime usage. Actually, there is an issue with volumetric use there.
Lord Best: What about the 60-year life?
Matthew Jupp: That is the minimum that lenders would expect from a property. If it meets that criterion, most lenders would be quite comfortable lending on it.
Lord Best: There could be a resale later and there may not be 60 years left when the next buyer comes along.
Matthew Jupp: Yes. Why 60 years? I guess that is a reasonably long time for a property to exist. You would expect it to go through two, three or four ownerships within that period, so its value is a bit more understandable. It is probably what more of us would recognise as a proper home and a proper house. That is the figure that is widely accepted. BOPAS, for example, has a criterion of 60 years, which is what lenders will often want to see. If it has BOPAS acceptance, that is part of the way for lenders to lend on it.
Lord Best: You would not go with the BSA line on this.
Matthew Jupp: I would have to look into the individual lender policies a little more, but I would not recognise its view particularly, no.
Richard Smith: I take the 60-year durability to mean that, throughout that 60 years, the building will remain durable with what you would consider normal maintenance. The issue with the 60-year durability is that, when you get to that age, the building may still be durable but may need more significant repairs to keep it durable. That is typical of any property, not just MMC.
On assessment processes, NHBC has assessed a number of volumetric manufacturers and insured a number of volumetric schemes. TopHat is a manufacturer that we are currently working with, but we have worked with and approved other volumetric manufacturers.
Mervyn Skeet: What would help us would be a publicly accessible database that provides more details on methods of construction. That would be really useful, because it would help us to understand all the materials used, whether it be a category 1 or category 2.
The Chair: It is materials again. It is this materials question that I do not understand. Sorry, go on. I have asked you already, but why materials?
Mervyn Skeet: Materials and methods of construction are linked. You may say that all materials are fine, but until you put them together with the methods of construction, you do not know that those individual materials will be fine working together. It is not about the individual material; it is about the materials working together and how they are pulled together. Some form of database that gave us a sense of how those buildings are pulled together, including the materials, so that we can work out how they link together, would be very useful.
The Chair: I just throw this in. Where we are coming from, so you are clear about this, is that, say 10 years ago, a large number of people would have been advocating that volumetric off-site construction and on-site assembly was a path that the construction industry was going to have to follow, partly because it was going to reduce costs and partly because it was going to respond to a lack of labour in the traditional trades. That lack of labour is partly demographic, of course, but it was exacerbated by Brexit, so it was an even more acute prompt to get on and start working in new ways.
Homes could be delivered more quickly and cheaply. They roll through, and the benefits will become apparent to people seeking homes, because we have an acute housing shortage in this country—it is a matter of public policy—which these homes contribute to addressing. That has not happened, and it is put to us—you can read this in the newspapers—that one reason why it has not happened is precisely because the business sectors that you represent have been slow, unimaginative and unwilling to contemplate the new.
Our job here today, if you like, is to decide whether you are a serious obstacle to rolling this out. I am not hearing the sort of crisp clarity in response to Lord Best’s question that persuades me that you really have grasped category 1 MMC and have got on top of it as a real issue. In a sense, I am making this intervention now to give you a chance before we end the session to understand what we are looking to hear from you. I hope I have not interrupted you, Lord Best, or misrepresented you at all.
That is where we are coming from. Are you the problem? You have a chance to tell us that you are not and explain why you are not, but you are not really hacking it.
Mervyn Skeet: I said at the beginning that insurance is available for modern methods of construction. There are many insurers providing that. We are saying that we are looking for additional ways to facilitate it. Having a database, for example, would help the industry to move more quickly.
The Chair: Insurance companies are very good at putting databases together. That is what they do. That is what actuaries do. They put data together and then mine it. They do not ask me, or the Government, to put a database together for them.
Mervyn Skeet: It is about being clear about how these buildings are put together so that we can make sure that they will be resilient and stand the test of time.
Q60 The Chair: Yes, absolutely. A database would be very useful. I am not disputing that, but who in your sector is putting the database together?
Mervyn Skeet: As mentioned earlier, we are collecting data as we go, but we do not have the same level of data that we have on standard construction, because obviously that has been in use for much longer.
The Chair: Are you sharing data with other businesses in the sector that will allow you to assemble a broader and more resilient database earlier and more quickly? If the insurance industry was taking this seriously as a product, it might, for example, say, “We’ll get together and share the data”.
Richard Smith: Would you mind if I take a step back and say what we have done? At NHBC, we worked with an all-industry working group, probably 10 years ago, and, as part of that, developed an acceptance service for manufacturers or developers that want to use modern methods of construction, including volumetric closed-panel systems. We have worked with a number of manufacturers during their development process. Unfortunately, some of them are no longer with us, but they developed a good product with our support.
We took a considerable amount of time, over and above what we would normally do on a traditional building, to support the construction process, get involved with our quality management process, and physically inspect those buildings in the factory, which those manufacturers seemed quite grateful for. We will incur losses with those particular manufacturers as a result, but we supported them from a grass-roots stage to the stage when they stopped producing those kinds of properties. They were good properties and we were happy to insure them. We supported the industry in that respect.
The one thing I will not do is support a manufacturer that I feel will not build a home to the right quality and will not demonstrate to NHBC that our standards are met. I do not think it is reasonable for a homeowner or an occupier to occupy a property that is not to that standard. Some manufacturers have told us that they are building one way and then have built in a different method that has fire risks, such as fire collars missing. To be fair, I think we have grasped that nettle and worked with manufacturers to build a decent property and grow that business with them.
Q61 The Chair: What about Mr Jupp? You gave us the impression that lots of lenders out there are willing to lend on volumetric category 1 properties. I do not know whether you represent building societies, but your response when Lord Best quoted the Building Societies Association appeared to say that they are rather difficult. Is the mortgage sector a problem?
Matthew Jupp: We represent some building societies. I have not seen the evidence from the Building Societies Association, so I do not know exactly what it has said. Mortgage lenders are in the business of lending money to people to buy homes, and provided they are comfortable with the properties, they will lend on them.
The Chair: I know that.
Matthew Jupp: I am not aware of lenders having blanket policies saying that they will not lend on particular types of property. I am not sure what more I can say on that.
The Chair: There are no blanket policies, but you cannot give us anything more granular than that about your members. You cannot say, for example, whether your members, not having blanket policies, might have policies whereby MMC homes go into a special process internally that has to be followed. You cannot give us data on how many applications for MMC homes are rejected on grounds of safety or other non-financial considerations, not that they cannot afford to pay the deposit or that their income is too low. I do not mean applicant-specific things, but you see what I mean. You cannot give us any data of a granular character about that among your members.
Matthew Jupp: We would not have that granular data, no.
The Chair: Your members would have it.
Matthew Jupp: In the process that you are talking about, there is a more stringent look at these properties as part of the mortgage process, because, as I say, lenders want to make sure that they meet certain criteria to do with the longevity, the warranty, the insurance and the ongoing marketability and attractiveness of it. That involves more scrutiny from a lender perspective.
Q62 Lord Berkeley: Mr Skeet said that all the MMC properties could be insured—“We insure everything”—but, of course, you can pay double the premium for a more risky property. Would the premium for a house of the same size and built in the same location be the same whether it was built by MMC or by traditional means, or would it be extra for a house built by MMC?
Mervyn Skeet: It would depend on the property. Each insurance company will look at a property on an individual basis. If it knows how that property has been constructed under MMC and is satisfied that the right fire breaks and everything else are in place, there is no reason why it should not be the same. If it cannot get that comfort, there may be a risk premium on top of that. It is about understanding the possible maximum loss from that building being destroyed.
Q63 Lord Carrington of Fulham: I want to carry on exploring a bit of the finances that my colleague, Lord Berkeley, introduced into the equation. Is insuring, and indeed providing warranties on, MMC buildings a more complicated business to do? Does it take more man hours? Can the insurance and the warranty establishments cope with that quite easily? I can understand that, as Lord Berkeley was saying, you might assess the risk differently, but there is also the problem of how difficult it is to assess the risk. That is what I am really trying to get at. Is that still a problem, or will it resolve itself only when you have the databases and the experience of this type of construction?
Richard Smith: It has certainly taken a lot more resource to carry out a risk management process for volumetric construction and modern methods of construction. And not only that; it is the skill set of the individual doing it. At NHBC, we have teams that are trained and developed to carry out specific risk management processes for volumetric and modern methods of construction. Also, we have had to put dedicated teams in for assessment of those modern methods of construction. We have had to spend a lot more time intervening, inspecting and checking quality management processes than we typically would on traditional construction. Part of that is an education piece. I spoke earlier about how we have worked with certain manufacturers. We have learned as much as they have through that process, and we now have a much more robust risk management process based on those learnings.
Lord Carrington of Fulham: You can go into a traditionally built house towards the end of the construction, look at it and say, “Yes, we understand what’s happened here. We can understand what the risks are. Therefore, we can do our processes to decide whether we’re going to warranty or insure it”. That is relatively simple.
You must need to inspect in the process of manufacture in the factory something that is, effectively, built not in sealed units but sometimes in close to sealed units. Indeed, particularly because of the difficulty of erecting the class 1 structures, which need foundations that have been described to us as being so accurate as to test the building skills of the foundation makers and the drain makers, presumably you must go in and examine them at that point—when the foundations have been built and before the construction has started.
Richard Smith: Correct, and in many cases that includes physical inspection overseas—previously, the sites that we were inspecting were in the UK—which has its challenges. We have been to factories to physically inspect units in eastern Europe and elsewhere around the world.
Lord Carrington of Fulham: All this presumably adds to cost, so it affects the premium directly. More importantly, I suspect it also limits the willingness of some companies to provide the insurance and the warranties, because they do not want to take on the extra work, employ their staff and man hours, and so on, in doing this. However much they increase the premium, it will not repay them for the extra resources, capital, investment utilisation or whatever to do this. Would that be right? Does it limit the size of the market, in other words?
Richard Smith: At this stage, we charge the manufacturer a fee to carry out that assessment up front. That is outside our risk management process, but at present we do not charge any additional premium or inspection fees for constructions when they are placed as orders with us at NHBC to inspect. We charge a process for assessment, but the fees are rated on the ability to build to our rating system. We have not separated the material costs on that. We do a lot more physical work for the same fee that we would charge for inspections on a standard dwelling.
Lord Carrington of Fulham: That must make you pretty reluctant to do it sometimes.
Richard Smith: No, we are keen to support in that respect. We want to encourage the use of MMC, so we have done that for that reason.
Q64 Lord Carrington of Fulham: Mr Skeet, there are a lot of insurance companies providing this financing for construction. Is it a problem for insurance companies? Do some insurance companies just say, “This isn’t worth the candle”?
Mervyn Skeet: Every insurer will have its own risk appetite for what it wants to cover. There is an active competitive market out there for MMC. Some insurers are very comfortable doing this and others are not. I suspect that, over time, more insurers will become comfortable with it. There is a natural progression, as more information is gathered on how these properties are pulled together, to make sure that they are covered.
Lord Carrington of Fulham: Mr Jupp, to come back to what you were saying about banks, and indeed building societies, you say that your members are very relaxed about it, but that is provided that the warranties and the insurance are in place at a satisfactory level to minimise the risk of financial loss if anything goes wrong.
Matthew Jupp: Certainly, yes. Lenders would not lend on properties that do not have a warranty in place, and it is a part of a mortgage lender’s terms and conditions that building insurance is in place for the lifetime of a mortgage. Those are key criteria.
Lord Carrington of Fulham: Once that is in place, that is most of the risk covered. Therefore, they are relatively relaxed about the construction method, because the risk is not theirs any more.
Matthew Jupp: They would still want to understand it. They would want to look into it, but those are key criteria.
Q65 Lord Carrington of Fulham: Does the fact that so many companies have gone bust, particularly in the system 1 area, cause a problem? If something goes wrong under the warranty, the warranty provider has to get a construction company to come in and put it right. If the manufacturer has gone bust in a system-built project, other manufacturers may not have the same skills or even the willingness to go in there and put things right at a price—there is always a price, although people will do it if you pay them enough—that makes any sense for the warranty providers or the insurers. Is that a problem? In other words, is the insolvency rate in this industry, which is massive, causing people to say, “If we have a calamity and a call on our insurance or our warranty, this is a real problem for us”?
Richard Smith: I can only comment on what is happening at the moment in relation to some of the volumetric manufacturers that are no longer in business. We have our Buildmark policy and our insolvency cover, and we have activated that insolvency cover in some circumstances and continued to support the end user, if you like, whether that be a social housing provider or consumer, to get the property that it has paid for or purchased, in line with our policy. That is what I was saying earlier about how we have supported the industry. We have incurred some losses, because we are going through that process, but that is what the policy is there to do.
Mervyn Skeet: It is probably more of a consideration on the professional indemnity side and the trade credit side, because obviously that will have an impact on that. Trade credit insurers clearly play a pretty important role in making sure that there is coverage when your supplier goes out of business. That is the area where it would be an insurance issue.
Lord Carrington of Fulham: There are also the technical skills. One thing we have learned is that all the manufacturers manufacture in a slightly different way and have different processes. One manufacturer’s skill set may not be able to rectify a bankrupt manufacturer’s buildings. Is that right? Is it possible to take one manufacturer and say, “We can solve this problem with the bankrupt manufacturer’s buildings”?
Richard Smith: All I can say is that I have no experience of that.
Q66 Baroness Cohen of Pimlico: We have been talking largely about housing and the particular insurance risk with housing. It seems to me that the obvious place to use MMC must be non-residential buildings, such as offices and hospitals. Do the same problems apply to the manufacturer of non-residential buildings, which seems an obvious place to use MMC? Do they have the same difficulty with insurance and warranties, or is that something that you all understand very well?
Mervyn Skeet: From an insurance perspective, we would look at things in the same way, whether it is a residential policy or a building for manufacture.
The Chair: We know that you look at things in the same way, but how does that work out in practice? We know that insurance companies can have the same policy and the same approach. You would have the same approach to insuring my kettle. It is not very illuminating at the sort of level we are looking at.
What we are trying to dig into here is whether we are having similar problems with schools, for example—we hear that MMC-type methods are being deployed in recent schools. That is fine. I do not think that is a good thing or a bad thing, but it is being done. Are you aware of any issues with schools? The MoD housing estate is back to residential, even though the Government are the client, and we understand that that is also using MMC. I do not know whether the MoD insures houses. It may well self-insure, because it is a government department, which is probably a very good way of spending its premium, so to speak, rather than giving it to the insurance industry. I do not know, so it may not come across your desk. Do you have any more granular detail on that?
Mervyn Skeet: All I can say is that there is no different focus in the industry on manufacturing buildings versus residential buildings. We are not looking at things in a different way. Of course, the buildings are assessed differently; a school building will be assessed differently from a residential property. In the method of construction, the same principles apply. Is that building resilient? Is it pulled together correctly, and can we therefore minimise the expected loss if that building were to be damaged by fire or water or in another way?
The Chair: Schools do not normally get built on a mortgage, I grant you, but you may have comments to make. There may be some PFI-type element, or whatever, but maybe not.
Matthew Jupp: I am not aware of any. Generally, with commercial buildings, it is a business-to-business transaction and much more bespoke. I imagine that the construction of a building would be just one element of an overall package looking at the economics of that particular development. I do not have a broader comment than that.
The Chair: I have a suspicion that lenders financing large office projects do not look at the construction method at all, in fact. I could give you a few examples of where I know they have not. It is, as you say, a financial transaction. It is more about square feet than construction method.
Richard Smith: From an NHBC point of view, we do very little commercial work. We are predominantly a warranty provider for new housing. We have a policy called Buildmark Connect, which is focused on mixed-use developments; you may have retail premises beneath flats. That is as far as it goes, really, so it is a very small proportion. The only thing I would say is that we apply the same risk management processes to those types of construction as we do to any other construction.
Baroness Cohen of Pimlico: The question, as put, is this: do non-residential buildings using MMC, such as offices, hospitals, schools and supermarkets, have difficulty getting warranties and insurance? Those are people who do not insure themselves. The MoD, as I understand it, insures its buildings, but the rest of them do not.
Mervyn Skeet: I have no information to tell me that anybody in that area is struggling to get insurance for those buildings.
Q67 Baroness Eaton: This question is probably not relevant to our guests, but we have read in some things that fire risk is considered a very serious problem. It is not in continental and other countries, because they do things differently, but we do not know what the difference is in what they do. Have we talked at all about that today? Forgive me if it is irrelevant. We can discuss it later.
The Chair: No, we have not talked about foreign comparisons or what these particular industry sectors can learn from abroad. You may be thinking about what we have read about similar methods of construction in the United States, which are flourishing and which normally require—I say that, because I do not know whether this is a federal or a state requirement—the incorporation of sprinkler systems even for low‑level buildings, whereas there is no requirement for sprinkler systems here. This is the sort of thing that you might have mentioned as being an obstacle in some way.
Mervyn Skeet: It would help.
The Chair: I can see that. What is your view of it?
Mervyn Skeet: We support what is happening in the US on sprinkler systems. In fact, part of the Mass Timber Insurance Playbook that we pulled together with building resilience specialists was about having sprinklers in timber buildings.
Q68 Lord Berkeley: Could I follow up on the sprinkler question? Mr Smith mentioned MMC in mixed-use developments that have, say, a shop below and residential above. There, of course, the building regs are different if they are separately owned or people live there. Are you lobbying hard for sprinklers, or for mist, which is the latest way of putting fires out? As Baroness Eaton said, there seems to be a very strong argument for having it installed much more generally.
Richard Smith: From an NHBC building control perspective, we have to review the information as presented to us. If there is evidence of a compliant method, we have to accept that. I think you are referring to the point of compartmentation in buildings. The current building regulations are focused on compartmentation. I sit on a number of government working groups on fire prevention in that respect. NHBC would always comment on those. Sprinklers are one solution, but not necessarily the only solution, particularly in lower-rise buildings.
Q69 Lord Best: When we came into this whole subject, it was rather on the back of the failures of quite a few companies out there. In response to Lord Carrington, you were being reassuring that this has made no difference to any of the policies or approaches that you are taking. Reflecting on that, do those business failures make a difference? Has the world changed at all, or are these what one might expect in a new industry or whatever? Can one be fairly dismissive, since they are not particularly important events in the great scheme of things?
Richard Smith: From an NHBC point of view, we still want to support the industry with modern methods of construction. We recognise that this is part of a process of changing the way we build to be more sustainable and to build more quickly and efficiently. There are a number of other significant challenges with supply chain in volumetric such as keeping a factory going and producing new modules. You cannot slow down and speed up that pace compared to a traditional site. We have had issues for some time with volumetric buildings being built in a factory and installed externally because they cannot get to site on time. That represents a risk to us, and we have worked with those manufacturers on that. We are still committed to modern methods of construction, but we want them to be of the right quality.
Matthew Jupp: From a mortgage lender perspective, we would expect a warranty provider to have that kind of insolvency cover in its system. When it comes to MMC and other developers, SME developers in particular, which are more at risk of failure, they would probably scrutinise and double check that to make sure that it is in a warranty where they can lend on it.
More broadly on the kinds of failures that we have seen in the MMC market, there is a slight sense of sadness in the mortgage lending industry. We were quite keen to see these companies develop and become a more regular, more normal and bigger part of our housing market. There was a genuine sense of excitement in the industry when they were first set up, with lots of visits to the factories and the sites to see them being developed. The fact that it has not really taken off is generally seen as quite sad.
The Chair: Can I thank you all very much indeed for your time? Can I just remind you that, if you are reasonably prompt, we are still open to receiving written evidence that could support or amplify the evidence we have heard from you today? It can be sent to the clerk of the committee, over the next two weeks. We will start writing up our final conclusions when the committee resumes on 9 January, so we will be working on our report then and will finish it quite quickly. We will certainly have got it out of the way by the third week of January, so anything you can give us over that period will be very well received and regarded as formal evidence to the committee, and we will take account of it in drafting our report. Beyond that, I thank you very much indeed for your time today and for coming to see us. We found it very interesting indeed.
