Insurance in social housing: how ballooning premiums and increased demands are causing a ‘crisis point’

A seller’s market

As many financial directors will know, premium multiplication and market reticence are a relatively new pattern in insurance.

“The social housing market had been very comfortable for more than 20 years,” says Mr Flint. “Housing associations had been paying comparatively low premium rates and these rates had been so low for such a long time because there had been strong competition in the market.”

With far fewer insurers around, this once-buoyant buyer’s market has turned into a seller’s one. “Associations now need to sell their risk to a financial institution, which possibly doesn’t want all parts of it,” Mr Flint adds. “This rapid change in dynamic has caught associations by surprise and many are not ready to sell themselves in this way.”

Global insurance broker Gallagher described the social housing market as “very challenging” in a recent briefing. The insurance industry was responding to an escalation in the number of claims made by housing providers, especially for fires, it added. Insurers had also become more inquisitive about cladding after the Grenfell Tower fire and found that “many associations” were unable to respond to these new queries.

Insurers also found that associations had supplied inaccurate valuations for properties, as many failed to carry out regular checks, the briefing says. The property cover of one association respondent with between 10,000 and 49,000 homes soared after it boosted the rebuild valuation of its portfolio by £1bn.

Zurich, one of the few firms offering social housing insurance, confirmed that the market had shrunk as other providers had withdrawn or were “considering their positions”.

“There has been a significant deterioration in the number and cost of claims, resulting in housing association portfolios being underpriced,” a spokesperson says. “This means that insurance premiums now reflect these changes more accurately.”

The insurance industry itself also faced an “unprecedented level” of claims inflation from changes in the “political and economic landscape”, the spokesperson adds.

Which premiums are most affected?

According to our survey, the largest increases in premiums were for leasehold, cyber and property insurance. However, housing associations are also facing major difficulties with flood cover. 

One association we spoke to has seen its excess for flood cover rise five-fold, and pointed to the 2021 flash floods across London as a reason. The London Fire Brigade has issued multiple flood warnings since then, most recently in June.

Mr Flint says insurers now see flooding as a more regular event. “It is no longer considered a one-in-50-year occurrence or something that happens in Cumbria, but something that happens, and in urban areas, too.” As social landlords, associations’ flood insurance also has to cover the cost of rehousing people whose homes are damaged – a potentially large sum in areas of high cost and demand.

The National Housing Federation (NHF) says it is “worrying” that a lot of associations are finding it hard to insure properties in areas with a high risk of flooding. Its members first flagged concerns about insurance costs last year, says John Butler, its finance policy leader. “The same issues have again emerged this year,” he adds. The NHF raised concerns about insurance costs during government talks about the rent cap and aims to raise them again with the Financial Conduct Authority, the insurance industry regulator.

Another area of cover subject to major adjustment is cyber. One respondent’s insurance costs for this cover rose by 342 per cent. It tightened its cyber security as a result.

“The excesses for cyber insurance are very high and are deteriorating, and the list of exclusions which apply are longer and longer,” another finance director says. “It is becoming really important because of attacks on public bodies. A large proportion of our rental income comes from housing benefit and Universal Credit. This makes the ability of local authorities and the Department for Work and Pensions to maintain their systems and cash flow very important to us,” she adds. 

Wolverhampton-based Bromford, which was subject to an attempted cyberattack last year, says that rising insurance costs had led to “urgent actions by the sector’s underwriters” to reduce the landlord’s exposure to increasing threats. Clarion’s 2022-23 surplus took a £17m hit following a cyberattack last year, most of which it attributes to the difficulties this caused with rent collection.

These changes in costs and access to cover have not gone unnoticed by lenders.

Eleanor James, partner at law firm Trowers & Hamlins, says that funders have started asking for “non-termination clauses” to be built into insurance arrangements. Such clauses are more common in the commercial real estate market and create a separate obligation for funders. “Under this, an insurer says it will not terminate an agreement without giving the lender notice.”

Ms James says that associations should also check whether their loan agreements include a limit on excesses. “These aren’t common clauses, but they may be built into loan agreements, particularly for ex-large-scale voluntary transfer organisations.”

Top 10 insurance areas

• Property
• Motor
• Cyber
• Public and employer’s liability
• Terrorism
• Crime
• Engineering
• Contractors
• Directors’ and officers’ liability
• Professional indemnity

Source: Social Housing survey; 14 respondents

‘Self-insurance’

Another consequence of the more challenging insurance market is that associations are increasingly considering “self-insurance”. This can mean different things. It can simply refer to agreeing a higher excess in exchange for reduced premiums, but it can also refer to sequestering a pool of cash from the business to cover predicted future losses.

Half of the 14 survey respondents say they use or are considering a form of self-insurance. “The withdrawal of providers and huge cost increases are forcing this approach,” one says.

Ms James says more associations are seeking advice on whether the sequestering form of self-insurance is possible under their loan agreements, but that many agreements “explicitly prohibit” it. One respondent to our survey says it is “unlikely our funders would accept” self-insurance.

The Regulator of Social Housing says it has discussed access to insurance with lenders and associations. “We expect providers to monitor their compliance with loan covenants and inform lenders promptly if they experience issues that may impact compliance.”

An even more niche form of self-insurance is the so-called captive protected cell company (see box, below). One such company is Igloo Insurance, a Guernsey-registered business set up for several associations in 2011. This model is still used by Clarion and Notting Hill Genesis and was used by Bromford until 2018, its accounts indicate. Bromford has now switched to a traditional insurance model, according to a spokesperson. They declined to say why.

Notting Hill Genesis, which suffered serious damage to many of its properties in the 2021 flash floods, says that its use of Igloo had provided stability of premiums, reduced its exposure to volatility in the insurance market and allowed it to retain underwriting profits. “While not necessarily suitable for everyone… we have clearly seen that this structure has outperformed the market in recent years as market rates have risen,” a Notting Hill Genesis spokesperson adds.

So what else can associations do to keep insurance costs down?

How best to control costs

As well as looking at other insurance models, such as self-insurance, respondents are “benchmarking” their costs to other associations and finding ways to reduce risks, such as installing parking sensors on vans and training their drivers, the survey respondents say.

There are three key pieces of advice on which the consultants, brokers and insurers agree: get a grip on your business data, give yourself plenty of time to tender, and keep your insurer on side.

One of the biggest changes in the social housing market in recent years has been the increased inquisitiveness of insurers, they say. “There is definitely an additional burden in terms of keeping good records and evidence,” the finance director of a medium-sized association tells Social Housing. 

Gibbs Laidler’s Mr Flint says that insurers are now asking more questions “because of the losses they have sustained in recent years”.

“They didn’t previously ask many questions about subsidence and flood risk affecting individual properties or estates, but they have started to ask them now,” he adds.

This approach has left some associations struggling to respond to insurers’ requests for new information as their underwriters hear horror stories about social housing covered in unsafe cladding and riddled with damp and mould.

“They don’t hear about the positive side to social housing, that it is an extremely regulated sector with decent homes in the main,” says Mr Flint. “But they do look at the historically low premiums and low margins and say, ‘I am not taking that risk on at that price’.”

Self-insurance in a captive cell

Igloo is a self-insurance vehicle that operates a number of captive cell companies for associations. Associations use these captive cell companies to manage and segregate their insurance risks. In essence, instead of buying traditional insurance, the associations use Igloo to set up their own insurance company.

Each association has its own ‘protected cell’ and the assets and liabilities of their cells are kept legally separate from the others. This means that if one cell is hit with a large insurance claim, the other cells in Igloo and associations themselves are not affected directly.

Paul Francis, head of insurance and operational risk at Sovereign Network Group, agrees that insurers are being more selective, but says they are not being “needlessly difficult”.

“Insurers do not act without good reason,” he adds. “If you don’t have a good understanding of your asset base, evidenced through data, insurers simply can’t make a fair assessment of your risk and consequently can’t price it fairly either.”

He says early talks with insurers about cladding remediation plans have been essential. “We continue to work with them to make sure that these complex arrangements don’t compromise their position as our property insurer. It is important to us that they are comfortable with the risk that they are insuring.”

Waqar Ahmed, group finance director at L&Q, says the landlord takes its data disclosure obligations “extremely seriously” as it maintains “strong relationships” with its insurers and the market. “We are confident that this ensures that we remain an attractive proposition for the insurance market and this view is reflected in our ongoing engagement with them,” he says.

Zurich says its customers should have up-to-date professional valuations of their properties, provide comprehensive information about construction, including details about external wall insulation, and take steps to “influence the behaviours” of their tenants and leaseholders to reduce claims.

Given all these extra demands, associations are also being advised to check that they should have as much information as possible available and give themselves plenty of time to prepare for policy renewals in case more is requested.

“We are telling associations, particularly those with a large amount of stock, that they need to start planning for insurance procurement a year or two in advance,” says the NHF’s Mr Butler. “Associations should also now produce as much information as they can, because it’s a good way to increase the chances that more insurers will provide responses to their tenders.”

Despite all the challenges, there is some hope. Gallagher says three new insurers recently entered the market, although others have left. It is also exploring new models, such as co-insurance, where risk is split between multiple insurers. One association respondent says it had slashed its cyber insurance by 50 per cent after a tender. Another says it had recently received six good bids for a tender, a number it admits is unusual. “We believe this is due to the favourable risk profile of our housing association,” they say.

But in this tough seller’s market, it is not just the high-risk associations, those hit with eye-watering premiums year after year, that seem to be suffering, but everyone searching for cover. “We’re all at the mercy of the market,” one senior housing association figure tells us after recently completing their tender. “We have been as proactive as we can be and it still isn’t shielding us against these rises.”

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