Why insurance will be pivotal to letting agents' landlord proposition in 2021

Rent protection insurance has never been a more crucial component of a letting agency's landlord proposition than it has been this year, providing landlords - and their agents - with the security of income in an environment of uncertainty. Now, in the midst of a second national lockdown, it’s more important than ever that letting agents are offering their landlords this protection as part of a comprehensive proposition. Goodlord’s Head of Insurance, Oli Sherlock, talks about how the market has changed in 2020 and how a comprehensive rent guarantee product can help letting agents strengthen their offering to landlords in 2021.

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How has the lettings market changed this year as a result of the Covid-19 pandemic?

Let’s start with the impact of the pandemic on lettings volumes, which we track with our Lettings Activity Tracker.  There's been very few times that we've tipped over the 2019 volumes. Now, I recognise from speaking to a lot of agents week to week that we've felt extremely busy, almost busier than ever before. But in reality, across the board, averages have been like for like - if not below - 2019's benchmark. 

Now, that was obviously going to be the case during lockdown, especially lockdown 1.0, as the market was effectively shut by the government. When the market returned in May, there was a slight spike there, but it then went back down and for the last couple of months, we've been running below 2019 averages. It’s interesting, because it feels like we're a lot busier than that, especially in the offices. But in reality, those volumes aren't coming through. That does pose questions into what volumes will look like in 2021 and what we should be expecting as new year starts.

In terms of rental prices, every area, bar greater London, has actually grown this year. There has been a lot in the press to suggest that rental prices are going backward and while that does seem to be the case in London, but in reality across the rest of the country we are seeing slight increases on rental amounts, so much so that actually the UK average is 1.4% higher than last year according to our Goodlord Rental Index. If rent continues to increase, then ultimately, that could have a pressure on affordability.

How have these changes impacted rent protection insurance?

Claims for rent protection increased by over 400% from the first to second quarter this year. This will be no surprise, as at that stage we entered the pandemic, and there was more and more pressure on tenants and, at Goodlord, we recognised that risk straightaway. That 400% increase was quite a jump and that has slowed somewhat, and the third quarter represented quite a large decline against the quarter one performance. However, quarter four is showing that ultimately that risk is still there. 

So claims volumes have remained high and that applies a lot of pressure onto any product in the market. It's important to understand what effect that has, because that's going to really dictate as to how useful your product is, in the sense of what level of comprehension providers can offer. It'll also dictate the pricing for you too. One of the steps we took to try and mitigate some of that risk and give higher support to our letting agents and their landlords was to include a pre-claims process at the very start of that journey and what we've managed to do is resolve 26% of cases through that pre-claims process.

That pre-claims process is effectively taking the heavy lifting from you and doing an awful lot of the mediation between tenants and landlord that's necessary to ensure that, if this does go to court, we've ticked all the boxes, but also that we are giving the tenant fair opportunity to make the payments or suggest a payment plan that may work. Now, that 26% of cases obviously needed full tenant engagement to get there as well. The automation we built around connecting tenants with ourselves and then connecting ourselves with you as agents I think has proved beneficial. 

What do you think these changes could mean for 2021?

My forecast is that volumes could continue to be below the 2019 benchmark. Now, I think we would have expected growth through 2020. We would have expected to see more lets completed in 2020 than we did in 2019 - that hasn't materialised, and the pandemic is obviously the main reason for that. But I think we're still going to suffer a hangover going into 2021, and therefore volumes could continue below that benchmark.

We've also seen a drop in confidence and increased barriers that may result in an increase of landlords exiting the market. I think landlords have felt ultimately pressured in the sense of having little confidence  in the legislation being there to support them. There's also potential changes to capital gains tax, which could really affect landlords' position too. So we may see more landlords exit the market than ever before.

We do expect UK rental amounts to continue to grow, although affordability may be tighter. Our data is showing that earnings in Greater London have been going down over the course of this year and, whilst the average earnings in the rest of the UK are rising, it's only very slightly - effectively, it’s pretty much a flat line. So if rents continue to rise and earnings don't, and I think it's fair to assume that there won't be a huge push in earnings next year given what we've experienced this year, then there could be a lot more pressure around affordability when it comes to assessing tenants as to whether they can ultimately pay the rent.

We are seeing tenure increase as well, so the average length of tenancy could continue to rise. that makes sense to me, as people become more comfortable where they live. We saw massive activity after the first lockdown, as people wanted to relocate to somewhere that had a garden, for example, but ultimately, without  new stock into the market, we may see our trend extend further. On one hand,, that's a good thing, but from a revenue perspective for agents, it maybe isn't as positive. I do expect there as well to be further pressure on fees. We haven't really seen that go away this year, although  agents are doing more now than ever before. One of the main takeaways for me, is understanding how letting agents can transition from a very, very stressful and fraught 2020 into hopefully having a plan for 2021.

What could these changes mean for rent protection products and the insurance market in general?

Moving forward, we see March 2021 as pivotal. I think it's pivotal for the lettings industry, frankly, I think it's pivotal for the country. And It's going to be just as pivotal for products like this. And the main reasons for that is because that's when furlough is due to end, so we're going to understand any economic fallout from the removal of furlough.  We're also due to see schedule 29 of the coronavirus act, which pertains to the eviction process, expiring on March 31. There are big question marks over what happens after March. Now, some are suggesting that we'll see the removal of section 21 completely, that the government will take this opportunity to make good on their promise in their manifesto to abolish section 21 and replace it with a more robust section 8. Others are suggesting there could be a continuation of the elongated eviction windows that we've already seen.

That will be pivotal in terms how products like rent protection, frankly, exist, and what the pricing around them is. It'll also be pivotal to how landlords interact with tenants. Because if they go into the best part of next year knowing that they are effectively hamstrung in evicting their tenants should they not adhere to their contract, we may see further declines of confidence from landlords. Hopefully, that's not the case, I would like to think from an economic point of view, three months into next year, we're in a far better place than we are now. There’s been good news over the last couple weeks around two particular vaccines and  I also see that the economy is somewhat rebounding too. So by the time we get to March next year, hopefully there'll be no necessity to have to give tenants more than six months' notice, and we will be getting closer to something more like normal.

The insurance market continues to be really cautious in light of this continued uncertainty. You'll notice that there's still some providers that don't have access to products. You'll also note that some of those products that are in the market have  been watered down somewhat. Insurers are not wanting to take, the big risks that they did before, and we've seen changes to products like excesses being added, reductions of cover - pretty much across the market - down to six months, which is something we haven't done with our policy at Goodlord - we’ve maintained 12 months. We've also seen  a big swing in pricing, with some taking moves very, very early on in the year to vastly increase their policies. Others have slowly increased over time depending on the risks that they're seeing.

That disparity in the comprehension across the market is one that could be lost on a lot of agents on the basis that you may not be aware that there's plenty of other alternatives out there. The best piece of advice I can give you is to compare what you have now to what else is out in the market. There is now a big disparity between some of these services. That was never really the case before - there were a few nuances, where some policies would offer 75% of rent after vacant possession, but others would offer 50%. Now the question is does it cover me for six or 12 months? Does it have a two-month excess or no excess? These are big differences that can have a real impact on your customers.

I do understand why some companies have taken that action and if you look at the numbers, from a claims performance point of view that makes sense. It is though, I would argue, why these products exist. From a Goodlord perspective, we have tried to ensure that we are backing that product to a comprehension point of view as much as we possibly can, not changing those benefits throughout this year,  and making sure that we're pricing this product correctly according to the risk that we're actually seeing. 

Legislation has  had a major impact  on the rent protection products themselves. Notably, the extension of the notice period to six months, which has materially affected the claims costs. We're coming from a place where before we would have had an average claim process of around four to five months. Now, you're looking at closer to 11 months and that almost doubles, if not more, the amount of money an insurer's paying out. 

On that basis, though, I think this again highlights why having a product that pays for up to 12 months is so important. Because in reality, under the current legislation where  you have to give six months' notice, a product paying for only six months is not going to cut it from a landlord perspective. I think from a landlord perspective when they hear rent protection - or, as it's called in the open market, “rent guarantee” - they believe that their rent is guaranteed. They probably didn't think about whether that was affected by the pandemic, and it's a very hard conversation for you to have. So, again, I would look to ensure that you have the most comprehensive cover in light of what we're going to be exposed to from a claims perspective.

How could a rent protection product support letting agents and landlords in the coming year?

A rent protection product provides support for the fact that, ultimately, tenants' affordability may be tighter. If that's the case, then there could be more risk associated with that tenant paying or not paying. Ideally, if you have a rent protection policy in place, you're giving yourself peace of mind, and the landlord. It can also provide support for the pressure on fees too and we've seen a big change in how letting agents are using this product over the last eight to nine months that has been linked to allowing them to increase their fees. Goodlord’s Rent Protection Insurance product is landing extremely well with landlords at the moment  and on average agents are benefiting by 2% to 2.5% extra due to use of this product.

For some the landlords, confidence and security has been tested to an unprecedented level. I think this is really important to remember when we're talking about this product, especially for agents that are only  using this kind of product sporadically or not using it at all, from a landlord perspective, the demand for this type of offering has never been higher. If you have a comprehensive service available to you, this is something that can really add value to your own proposition, but also to your relationship with your landlords. This could be the difference between landlords looking to exit the market and staying in the market and having confidence that, no matter what happens from a rental arrears perspective, they are protected for up to 12 months.

Landlords have had a really hard time of it - they've effectively been  asked to encapsulate all of the risk their tenant brings. They may well have mortgages in place themselves, whilst they could have got a couple of months' break, that won't be extended throughout. So their liabilities are ultimately fixed. And they've effectively been kicked, I think, time and time again and moving into next year there's a potential for that legislation changes to kick them even further. So something that gives them peace of mind, that gives them protection, may well be very beneficial in the current market. 

How are your customers using Goodlord’s Rent Protection Insurance product?

The message that we’re getting from letting agents that this is something that is really beneficial both for them and their landlords and  we've seen that the percentage of letting agents utilising this product has more than doubled this year. I think that's testament to the comprehension of the product we have, but also the ease in which you can actually get it through the Goodlord platform.

We're seeing the conversion has increased by  a third, which shows that agents are utilising this in a really positive way. They're engaging with their landlords, and  the landlords are  affirming this is something that is benefiting them. That increased demand from landlords actually plays into the fact that this can now form part of a standardised offering that can help increase letting agents increase your fee levels. On the basis that we accept that volumes could be lower or as low as in 2019, that there could be less landlords in the market than the previous years, this drive and competitiveness in the market is not going to go away. One way letting agents could equip themselves is with a very comprehensive rent protection policy as part of your standardised offering - building that into your fee structure as a standard proposition and using it as a niche to win as much business as possible.

I do believe that landlords will pay slightly more than they had envisaged, or indeed more than for another agent down the road, for the inclusion of a comprehensive product - at the end of the day, you want the best possible policy for you and your customer. Again, we're seeing  double the amount of agents using our products, and their conversion has increased by a third and these agents aren't giving this policy away. They're building this in as part of their fee structure. On average we're seeing agents increase their fees by 2% to 2.5%.

Rent protection doesn't just protect the landlord and give them peace of mind - it also protects your revenue as a letting agent. There's been a lot more emphasis on that this year than ever before. The reason that's important, I think, especially back in March when I was speaking to groups of agents, was that they were concerned that with widespread arrears their cash flow ultimately would be critically hit. Which is completely understandable. Now, whilst claims have indeed increased, we never got to the widespread panic stage of 50% of tenants not paying their rent, as was suggested back in mid-March. At the time, that we believed there would be risks. We believed there would be increases, but we didn't believe they would be as dramatic as others were suggesting - and I think we were right on that. 

We've shown that, yes, risk has increased, but there has been a level of control without making  drastic measures to your policy or increasing your policy price by 300%. We haven't seen that to be necessary this year. What that's meant, of course, is by doing that, more agents have been able to protect their own revenue, which must be a consideration going into 2021. Whilst I think the risk is dissipating, I do still believe there's an increased risk moving into next year and on that basis, if you can find a way to get an increased fee from your landlords through inclusion of this product in your proposition, and at the same time protect your own revenue on as many properties as possible, I'm hoping that's beneficial. We've seen more and more agents actually emphasise that as  one of the reasons they're  utilising this product, along with obviously protecting their landlords' peace of mind, too.