On the 21st April 2023, the financial conduct authority set out its reforms for multi-occupancy insurance following a review of the market which found plenty of evidence of unfair practices including extortionate commission levels and policy recommendations based on commission or remuneration levels to the party booking the insurance (usually freeholders or managing agents).
The report placed an obligation on brokers to immediately stop paying commissions to third parties (including property managing agents and freeholders) where they do not have appropriate justification and evidence for doing so in line with our rules on fair value.
So why do leasehold managing agents get commissions?
1. Customer expectation
Block managers deal with insurance on a daily basis and you would expect them (not always sadly), to be better educated with respect to insurance requirements than directors of an RMC/RTM who would only deal with this once a year. Managing agents can also achieve discounts based on economies of scale.
Managing agents have to be registered with the financial conduct authority and maintain a minimum level of professional indemnity insurance (should things go wrong).
3. Management of insurance claims
No insurers pay the costs of management of a claim, this is always extra. Many managing agents will manage claims for free (or rather paid for out of the commissions they get from insurers). Additionally, by processing claims via the managing agent, this can reduce the number of claims presented to an insurer. This is important, as insurers measure the number of claims presented annually (even if no payout is eventually made) and this can have a negative effect on premiums. For example, if the costs of making good a claim (e.eg minor water leak) are less than the excess, then a good managing agent will resolve this issue WITHOUT logging a claim and thereby prejudicing renewal terms.
So before a penny of commission is paid, managing agents have significant costs in being able to supply insurance to its clients, these costs being for indemnity insurance, FCA compliance, staff training and the costs of managing claims.
That said, the author of this article agrees that commissions should be justifiable and, in many cases, they are extortionate and I’m looking at the some of the larger managing agents that have several “layers” when it comes to placing insurance with each “layer” taking a cut.
At this year’s Institute of Residential Property Management Annual Seminar, this subject was a hot topic of debate with the IRPM favouring a 15% commission level.
Common Ground’s approach to insurance management is to take a maximum commission of 15% and to source quotes from TWO brokers. Most agents will use a single broker but ,in our opinion, this doesn’t lead to best value as brokers will often favour certain insurers based on THEIR commission levels. By creating a “tender” process at the broker level, it motivates the brokers to achieve the best premium for Common Ground’s customers.