Rent Protection Insurance, also known as rent guarantee insurance has been a popular add-on insurance for both professional and accidental landlords for many years now, and has enjoyed strong growth for legal expenses insurance companies and their distributors throughout that period.
However, the growth of rent protection insurance came to an abrupt end during the first quarter of 2020, and more specifically during the run up to the eventual lockdown on the 23rd March 2020.
Many legal expenses insurance companies were quick to stop writing any form of rent protection insurance altogether, and a few others made some immediate restrictions to try and reduce any future increases in exposure for new business only. Some of those later decided to pull the plug entirely as well, as the full gravity of the situation on the tenanted rental market began to sink in.
So, 100 days on from the official lockdown, and with restrictions being gradually and cautiously relaxed, is now the time for legal expenses insurers to get back into the rent protection insurance market again?
Before we answer that question, it is worth taking a look at why this niche rent protection insurance market is so popular.
What is Rent Protection Insurance?
Rent guarantee insurance or rent protection insurance is sold to landlords as a means of insurance protection against the risk that their tenants will be unable to pay their rent for any reason. It provides peace of mind for the landlord knowing that they will receive some rental income, even if the tenant does fail to pay and is in arrears.
When the cover actually operates, and how much is payable is dependent on the policy in force.
Some policies will pay after the tenant is in arrears by just one month, whereas others require a longer period of default. Monthly payments can range from £500 up to £3,000. The initial rent guarantee premiums the landlord would pay are much higher for the higher limits of indemnity as would be expected.
With 67% of landlords having experienced problems with tenants rent arrears in the past, it is easy to see the attractions from a landlord’s perspective.
Rent protection insurance not only covers any tenants rent arrears payments, but will also include cover for legal expenses.
Rent Protection and Legal Expenses Insurance Summary
· Rent Protection - You may be able to receive up to 12 months missed rental payments.
· Repossession – Legal expenses costs to secure vacant possession.
· Rent Recovery – Legal costs to pursue any rent arrears owed.
· Contract Disputes.
· Damage to Your Property.
· Defence of Criminal Prosecutions.
· Alternative Accommodation and Storage Costs.
· Nuisance and Trespass.
The standard limit of indemnity for rent protection insurance policies is usually £50,000. High net worth schemes would have a £100,000 limit of indemnity.
The covid-19 impact on tenant rent arrears so far
As already described in a previous article “Covid 19 - Impact on Legal Expenses Insurers?” it became clear very quickly that the pandemic, national lockdown, economic shock, recession, and ultimately job losses in the millions would hit the rental market very hard.
This caused the more experienced and longer serving rent protection insurance underwriters to pull cover for new business immediately, having previously witnessed what happened in the recession of 2008-9, thus leaving many rent guarantee brokers and intermediaries having to post messages such as this example:
“Due to the new emergency legislation that has been proposed by the government regarding the eviction of tenants, it is with regret that we have to notify you that our insurance partners have taken the decision to suspend all new Rent and Legal Insurance policy sales with immediate effect. Please accept our sincere apologies for the inconvenience this will cause, but unfortunately we have no option at this point in time.”
Whilst the unemployment rate has been creeping up all year, it is still only at 4%, compared to the 10% projected for Q2 and Q3 of this year. This has been kept under control by the Governments job retention scheme, and other state bailouts. When the schemes come to an end in late October 2020, there is predicted to be a wave of mass redundancies such as never seen before in the UK.
Housing charity Shelter says: “research among renters indicates that a quarter of tenants or 2.3 million people will lose their jobs and be unable to pay their rent over the next three months”.
This paints a very bleak future for tenants and their landlords in the short to medium term, but what is happening right now?
Factual evidence of tenant rent arrears
As alluded to in a previous blog factual data is now being produced clearly demonstrating the speed and level of tenant rent arrears, which increased from the usual mean rate of 6.5% in Jan and Feb, to 15% in March, 20.1% in April, and 29.7% in May. A huge move in just 3 Months.
June figures are due out soon, but it’s not looking good, I have just received an email in my inbox titled: Investor update – Reduced June 2020 Rental Dividend.
This fivefold increase in rent arrears, which will convert into a fivefold increase in claims frequency and costs for insurers is truly shocking, but as most tenants are actually still employed or at least on furlough until October, I think the worst is yet to come!
So is it time legal expenses insurers re-enter the rent protection insurance market?
After speaking to a number of the key rent protection insurance underwriters, and doing a bit of google research, the answer to this question is a unanimous NO. “The already distressed rental market is only going to get worse over the next 12 months” said one commentator, “firms with large or disproportionately large rent guarantee portfolios are going to get badly burnt”.
Another commentator said “The future risk to reward ratio for this class of business is now totally uninsurable. It is no longer a case of a manageable exposure to cost bearing risks, it is an exposure to certain rent arrears claims and costs, and an absolute certainty of losing money for the underwriter”.
He went on to say, “Anyone still writing rent guarantee insurance in this current climate has either no knowledge of the market, no concern for the underwriter or no medium to long term vision, or perhaps all three”.
So there you have it, most providers think it is still far too early to even consider re-entering the rent guarantee insurance market, and they believe there is worse to come before it settles down again. I would be very surprised if anyone re-entered the market at any time during 2020.