As the demand for social housing grows, understanding these complexities and leveraging specialist advice becomes crucial for Housing Associations to navigate the evolving insurance landscape effectively and ensure the protection of their investments.
Building warranty insurance, otherwise known as structural warranty, or latent defects insurance has, like many markets, undergone significant transition in recent years. At a macro level, major social, political and economic events such as the Brexit referendum, Grenfell tragedy, Coronavirus and the war in Ukraine have all significantly impacted on the insurance sector. Contractor insolvency and poor insurance capacity continue to feature in the UK warranty market. As a result, building warranties have generally become more expensive, harder to obtain and increasingly complex for Housing Associations.
Market context
In 2024, there was a net increase of nearly 43,000 social homes constructed compared to 2023. This growth was primarily fuelled by the addition of approximately 24,800 Affordable Rent homes and 17,300 low-cost home ownership homes. Additionally, there was a modest rise of about 700 social rent homes1.
The outlook for social housing development in 2025 and beyond appears promising. The Government plans to invest £5 billion in housing for the 2025-26 period, marking a £1 billion increase from the previous year. This includes an additional £500 million for the Affordable Homes Programme and an extra £50 million to accelerate planning reform2.
Furthermore, the social housing stock will be expanded through a new 5-year commitment to a social housing rent settlement, providing the sector with greater long-term funding certainty and enabling investment in tens of thousands of new homes. Efforts to preserve existing stock will include reducing Right to Buy discounts, ensuring that thousands more council homes remain within the sector2.
With the outlook of development in the sector appears promising, this article will explore some of the key issues and considerations faced by housing associations when obtaining building warranty insurance. It will also show how a specialist can assist Housing Associations in helping to de-risk the buying process as well as managing structural warranty requirements.
Contractor insolvency
There have been a number of high-profile contractor insolvencies in recent years including Buckingham Group, Henry Construction and most recently ISG. While these events have a significant impact on supply chains, they can also affect or even invalidate building warranty cover for a Housing Association. A change in contractor represents a ‘material change in risk’ in the eyes of the insurer and will provide them with the option to withdraw the original offer of insurance. Obtaining retrospective cover for Housing Associations with a suitable alternative market can also be a challenge, as the below sections will explore.
Contractor insolvency cover may be available with certain markets. As the name suggests, this cover is focused on the solvency of the main contractor and is in place during the build period. The cover will either indemnify a Housing Association of an amount, usually 10% of the contract value or the insurer will pay to complete the works. Warranty insurers have been less inclined to offer this cover in recent years in response to challenging economic conditions for contractors.
One final consideration for Housing Associations following a contractor insolvency is that insurers would typically look to pay any return insurance premiums back to the entity that originally paid for the policy (or their administrators). It is therefore advisable that the Housing Association look to pay directly for the warranty to avoid delays in recovery.
Unrated & unregulated insurers
The structural warranty market has had a negative history of poor quality, often, unrated insurance companies providing capacity to warranty providers. There have been a number of noticeable insurer insolvencies in recent years such as the collapse of Elite, Alpha/CRL and East West Insurance Company. Insurer failure has significant consequences for any insurance contract, however long-term policies such as building warranties are generally the worst affected as they will need to be replaced within the 12-year policy period. It’s critical for Housing Associations to ensure that the underlying insurer behind the building warranty has a minimum of an A-rating with at least one the major rating agencies.
More recently, insurance companies that are not domiciled or regulated in the UK have become increasing prevalent in the warranty sector. The lack of regulation means that little or no protection may be offered to consumers under the Financial Services Compensation Scheme (FSCS) or Financial Ombudsman Service (FOS).
It is not always obvious as to who the underlying insurer is, or indeed their financial strength or location. Gallagher has a panel of insurers that have been carefully selected with financial strength at the centre of our criteria and is regularly reviewed to ensure it meets the needs of our clients.
Retrospective cover
Closely linked with the financial issues discussed above, retrospective cover commonly refers to an application for building warranty insurance following the completion of a project, or when works are substantially complete. Typically, structural warranty insurance is recommended to be taken out prior to works commencing in order to allow the warranty provider to conduct inspections (commonly known as technical audits), throughout the build. However, there are a number of reasons why a Housing Association might require cover retrospectively, most common of which is following a contractor’s insolvency during the build phase/prior to warranty issuance. In this instance, the existing warranty is likely to be withdrawn on the basis of a ‘material change in risk’ and the Housing Association will have no choice but to seek alternative cover.
In these instances, premiums are very likely to be more expensive and the choice of warranties will be fairly limited when compared to before. Options to Housing Associations may be limited to a handful of insurers including those that are unrated, and the risks associated as has previously been discussed. Some contractor insolvency issues can be mitigated by an owner-led approach whereby the Housing Association retain ownership and control of the constructing process. Again, having an insurance professional to help obtain retrospective cover is crucial to ensuring a suitable replacement can be sourced.
Changing market conditions
Hard market conditions is a term used to describe the lack of available insurance capacity in a given sector following the withdrawal of capital. Capital may refer to whole insurers pulling out of the market or reducing the amount of business they wish to underwrite. This in turn leads to reduced competition and higher premiums. While hard market cycles are by definition, temporary, there are no guarantees of how long these trends can last and whether capacity and rates will return to the previous ‘soft’ market levels. Unlike many other insurance sectors that are experiencing ‘softer’ conditions, the structural warranty market continues to be in a hard market cycle, generally in response to the high rate of insolvencies and lack of A-rated capacity available. Such conditions further highlight the need for independent impartial advice and choice.
In summary, there are evidently a number of challenges facing Housing Associations in respect of structural warranty insurance. The significant events of the last few years have had a ‘trickle down’ effect on insurance availability, price and quality. Now more than ever, is the need for a straight-forward, specialist broker-led option to help alleviate some of the pain points often experienced when navigating the structural warranty market.
