RDC0007
Written evidence submitted by The Association of British Insurers (ABI)
About the ABI
1. The Association of British Insurers (ABI) is the voice of the UK’s world-leading insurance and long-term savings industry. A productive, inclusive and thriving sector, our industry is helping Britain thrive with a balanced and innovative economy, employing over 300,000 individuals in high-skilled lifelong careers, two-thirds of which are outside of London.
2. The UK insurance industry manages investments of over £1.7 trillion, pays nearly £12 billion in taxes to the Government and powers growth across the UK by enabling trade, risk-taking, investment and innovation. We are also a global success story, the largest in Europe and the fourth largest in the world.
3. Founded in 1985, the ABI represents over 200 member companies providing peace of mind to households and businesses across the UK, including most household names and specialist providers.
4. The ABI’s role is to:
- Get the right people together to help inform public policy debates, engaging with politicians, policymakers and regulators at home and abroad;
- Be the public voice of the sector, promoting the value of its products and highlighting its importance to the wider economy and society;
- Help encourage consumer understanding of the sector’s products and practices; and
- Support a competitive insurance industry, in the UK and overseas.
ABI Response to the Call for Evidence
- As an industry that is relied on to provide cover for people’s homes, businesses and personal possessions, insurers have a key interest in fit for purpose building regulations that protect lives and property from the risk of fire. The ABI has long been calling for the fundamental reform of the building regulations system and for Government to remediate dangerous cladding post-Grenfell. As with all areas of the system, the presence of dangerous cladding has impacted the insurance industry and this response sets out the industry’s position and key areas of interest.
Cladding Remediation and Building Regulation Reform
- The ABI welcome the publication of the National Audit Office report into cladding remediation. The report’s findings clearly highlight the scale of the challenge that remains in remediating dangerous cladding from both publicly owned and privately owned buildings. The removal of dangerous cladding is not an activity carried out under buildings insurance policy and we have been calling on the Government to remediate dangerous cladding as quickly as possible since the Grenfell tragedy in June 2017. We support the HCLG Select Committee’s call for cladding remediation works to be completed on social blocks by December 2021 and on all private blocks by June 2022. We welcome the Government’s ambition for all ACM cladding to be removed from social blocks by December 2021 with works on site underway by December 2020.
- We welcome the additional £1billion Building Safety Fund for cladding remediation and urge the Government to progress at pace with the remediation of dangerous cladding and the fundamental reform of the building regulatory framework. We also welcome the Government’s plans to extend the coverage of the fund to dangerous non-ACM cladding. Further detail on the scope of the fund and whether funding will be made available for the remediation of other fire safety risks, such as flammable insulation systems, is also required by the industry to understand the full fire risk.
- The industry does not have a view on whether the new funding will be sufficient to remediate all dangerous cladding however, we urge the Government to ensure that all the necessary funding is made available for cladding to be remediated as quickly as possible, and for additional funding to be committed if this is required. We agree with the Government that the building owner should be responsible for cladding remediation and the implementation of the Fire Safety Bill will help to establish the responsibilities of the building owner in law.
- The National Audit Office Report indicates that significant levels of the existing funding has not yet been allocated to buildings for remediation. Under previous funding mechanisms we understand there have been delays with funds being distributed and, once approved, delays with remediation works starting on high rise blocks. We urge the Government to ensure that the application process for the new Building Safety Fund is clear and accessible with centralised guidance and advice to support applicants. The fund needs a clear set of eligibility criteria to ensure that high rise blocks can get access to the funding for cladding to be remediated as quickly as possible. We also call for the funding from the previous remediation funds to be allocated as soon as possible.
- The ABI support the Government’s proposals to extend the cladding ban for high rise residential buildings from 18 metres to 11 metres. However, we believe the ban should not solely be based on trigger heights but should reflect the risk and vulnerability of the building and those within it. We believe that combustible cladding should not be used on care homes, hospitals, residential schools, hotels and student accommodation of any height. We have continuously stressed that permitting the use of any combustible cladding on the outside of any high rise or high-risk building creates additional risk. We were also pleased to see the Government’s recent announcement that new residential buildings of 11 metres or higher will require mandatory installation of sprinklers.
- We also have concerns about the testing review and framework. In 2018 the ABI commissioned research which highlighted significant concerns with the BS8414 testing regime. The results of the research clearly demonstrated that the current testing processes for cladding do not replicate real-world conditions and also highlighted that the current test does not consider, for example, the 20% of plastic within buildings which increases the size of the flames. The ABI has been calling for a renewed testing framework which is closely aligned to the realities of construction in the built environment, not one that is divorced from reality. Additionally, we are pleased to see the British Standards Institution acting to review the testing framework overall and welcome the recent updates to the testing regime.
- The ABI welcomes the Government’s commitment to the passage of the Fire Safety Bill. The Bill makes important updates to the Fire Safety Order and sets out clearly in legislation that the ultimate responsibility for building and fire safety lies with the building owner. We also welcome the announcement of the new Building Safety Regulator, which will be set up in shadow form within the HSE ahead of legislation. We urge the Government to publish the draft Building Safety Bill as soon as possible and we look forward to working with Government and Parliament to deliver the comprehensive, urgent reforms that are required to ensure building safety.
Leasehold buildings and cladding remediation
- We understand that some leaseholders who live in high rise buildings with combustible cladding have been experiencing increases in insurance premiums. We have been engaging with some leaseholder groups, the Insurance & Financial Services APPG as well as MHCLG officials and Ministers on these issues and have been discussing potential interim solutions for leaseholders. While we are very sympathetic to the issues some leaseholders are facing, we strongly believe that the ultimate solution is for the dangerous cladding to be remediated as quickly as possible.
- Buildings insurance is widely available, highly competitive and the market is working as it should. Although we are aware that there are a number of high rise residential buildings that are experiencing an increase in their premiums due to the increased risk at present, there is no systemic market failure relating to buildings insurance.
- Insurers continue to offer cover for high rise buildings with combustible cladding and will work with the building owner to incorporate other fire safety measures (such as 24 hour fire wardens). Buildings insurance is based on risk-reflective pricing, so if there is a perceived increased risk to the property, as there has been in relation to dangerous, flammable cladding since the Grenfell tragedy, this may be reflected in the premium.
- Buildings insurance is not a mechanism for remediation of inappropriate cladding. Buildings insurance covers the cost of repairing or rebuilding the structure of a building if it has been damaged by a named peril such as fire. The insurer will then arrange to rectify the damage and repair the property, or in some cases rebuild the property if needed. Buildings insurance does not cover the removal and replacement of inappropriate cladding or other building materials which require replacing. This work may be covered by a building warranty which provides cover for latent defects to newly built properties or is the responsibility of the building owner to arrange. NHBC have provided remediation where there were buildings within warranty.
- For the majority of large commercial buildings, including high rise residential blocks, most insurers will have a team of specialists who work with the customer on risk management of the building. The ABI is aware of concerns amongst some leaseholders that their managing agents do not always act in their best interests or strive to get the most appropriate building insurance for them, and it may be useful for residents with concerns to speak to the Leasehold Advisory Council.
- Following fundamental reform of the building regulations system and remediation of combustible cladding, the risk profile of these buildings should improve, which in turn may increase competitiveness amongst insurers in this market and benefit customers through associated effects on premiums.
- The idea of a ‘Cladding Re’ style solution has been suggested however, this is not something we support. There is no indication that this is a systemic market failure and the focus should be on completing cladding remediation. Buildings insurance is not a mechanism for removing dangerous cladding and, given that any re-insurance solution will take many years to establish while remediation is expected to be completed within the next 18-24 months, this is not an appropriate solution to the issues for leaseholders.
Professional Indemnity Insurance
- In the Government’s Building Safety Update in April, it was announced that a review into PII cover for building contractors and fire engineers would be undertaken by MHCLG. We recognise the difficulty that some building, surveying and construction professionals are experiencing in accessing appropriate PII cover for fire safety work. The industry has been clear that there needs to be fundamental reform of building regulations to provide clarity on the roles and responsibilities of those involved.
- In the current climate, including the lack of clarity over new building regulations which should fundamentally reform building and fire safety in the UK, and significant disproportionate costs for claims compared to the premium charged, the Professional Indemnity Insurance market in the UK has hardened significantly, and is now at a point where it is not considered a commercially attractive opportunity to underwrite construction PII cover for fire safety. This has led to a number of professionals, including fire engineers, architects and construction/cladding sub-contractors, to struggle to obtain PII cover that they need to complete fire safety works. The insurance industry is innovative, and therefore it is concerning that the market has not been able to develop a commercial solution to this problem that has been in development over the last three years. The ABI, IUA and Biba have all reported this lack of commercial appetite to the Fire Minister and MHCLG Officials and have requested the need for Government intervention. This is currently being discussed with Government officials.
- Many PII insurers in the construction sector are asking more questions to prospective clients relating to potential exposures (for both high rise and high-risk properties in particular). There is a level of uncertainty on insuring the construction industry, who are currently operating in a regulatory environment that has been found by Dame Judith Hackitt to be “not fit for purpose”, and a general view that there needs to be more rigorous competency based assessments of all those involved in the fire safety of a building.
- The market will generally reflect any changes in risk and the potential for significant PII claims in the sector in a post-Grenfell environment is clear. Claims may result from installation of cladding not in accordance with specification, an untested combination of materials used, or inadequate supervision of the installation process. It may be many years before the full consequences of these liabilities are known.
- As with any risks, insurers will be more attracted to good businesses who they can establish a long-term relationship with. Firms in the construction sector with accurate record-keeping, good knowledge of the materials they use, robust internal procedures and protocols and a risk management process for current and future projects will be more attractive to PI insurers.
EWS1 Forms
- The EWS1 form is an ‘External Wall System Certificate of Compliance’, which was devised in collaboration between the Royal Institute of Chartered Surveyors (RICS), Lenders and RICS Valuation Practitioners in 2019. The form was developed as an attempt to improve the ‘sale-ability’ of flats in blocks over 18 metres. A fire engineer (or similar) completes the form to confirm that there is no combustible material on the outside of the building, thus meaning it is safe for lenders to lend on. The form was created without any consultation with the insurance industry. The insurance industry is in discussions with RICS to review the form and understand whether it can be edited to achieve its intentions. The industry will continue to work with RICS and the Government on the implementation of the form.
- In the current market, however, fire engineers, valuers and surveyors are advising that they are unable to complete the form as they do not have the appropriate PII cover. Insurers are concerned that there are insufficient professionals/companies that have the necessary skills and qualifications to complete the form with the level of accuracy that is required and therefore would be liable if negligence is proven. The EWS1 form contains little or no indemnification of liability for the professional undertaking the review. In addition to this, the low cost of completing a form means that those doing it are unlikely to perform the appropriate investigations into a building’s construction to have absolute clarity that there is no combustible material on the building’s external wall. This means there is a disproportionately high risk for the PII insurer to face a potential claim amounting to millions of pounds should the professional completing the form be negligent. Premiums are therefore reflective of this risk.
July 2020