Opinion: Rent arrears insurance - a moral hazard
Published by Max Salsbury for 24dash.com in Housing and also in Finance
UK social housing tenants at risk from lack of home contents insurance
By John Cross, director, John Cross Consulting Ltd
The Times published a special business risks supplement yesterday [26 March].
It’s a good and recommended quick read for everybody engaged in business but particularly relevant to all of us working in the changing world of affordable housing.
Having read through the paper I was then reminded of my trip up to Warwick University for the NHF’s Finance Conference.
While I was wandering around the exhibition I came across a stand promoting an insurance against rent arrears. On the face of it, with the huge uncertainty and risk with the welfare reforms looming, this would appear to be a potentially sensible product.
But then I remembered headlines in 2012 when Dutch housing association Vestia posted £2 billion euros losses as a consequence of some perverse investment decisions and behaviours fueled in part by mutual risk insurance and guarantees.
Clearly managing risk and uncertainty is a core part of our business responsibilities and insurance may be part of the strategy. However, the fundamental starting point has to be understanding the risk and getting the business strategy and culture right.
Insuring against rent arrears is a prime example. As social businesses we face the ongoing dilemma of balancing the commercial needs with the social objectives. Helping disadvantaged people get good homes is what we are all about. However collecting the rent means we can pay the bills!
Do we continue to house the poorest and most challenged and with it come to terms with the new welfare systems or should we move into potentially lower, certainly different risk territory of only housing those who can pay? This may become the decision spectrum we face?
Insuring against payment default gives us one tool to manage that risk. From a front line perspective this means we can help those most disadvantaged – great! Most people I know in housing want to put their energy into helping people least able to help themselves. But like the Dutch seeing the insurance route as the risk mitigant can lead to perverse and dangerous ground.
Continuing to house only the most disadvantaged can lead us back into old territory. We may recreate the environment that David Page chronicled so well in his report for the Joseph Rowntree Foundation - ‘Building for Communities’ -in the late 1990s and which helped lead us into better more balanced allocations policies and practice.
With the punitive welfare reforms coming in I already hear calls from colleagues “but who will house these people if we don’t?” But here lies the dilemma – our moral hazard.
Insurance is great but what happens when the risk exceeds the premiums paid. Getting flood risk insurance on the Somerset Levels must be a real challenge but we may face that same type of challenge in the coming years if we don’t get our risk mitigation properly aligned.
What happens if you take out the rent arrears insurance and subsequently make big claims because you haven’t properly assessed and managed the risks – we’ve housed the most disadvantaged and they can’t pay? Or possibly its not even your decisions that have caused premiums to rise but the association down the road who has assumed “we don’t need to worry about arrears because we’re insured”!
I appreciate that this might be teaching many of you to “suck eggs” but understanding risks is the key. Fully understanding the risk of housing the most disadvantaged and how insurance might help is at the heart of the matter. But it can’t stop there it has to include a full and proper review of allocation and housing management policies to ensure they contribute to the management of risk. It has to include a re-evaluation of development strategies to make sure they are properly risk assessed for an uncertain welfare future. The whole business needs to be tuned into understanding and managing risk. It has to pervade the business culture of the organisation.
The HCA’s regulation focus post-Cosmopolitan was about the consequences of diversification. Clearly this was and remains highly relevant but for many the biggest risk to our business futures is not necessarily in our diversified portfolios but is in our core business areas.
Our values, our beliefs, our motivations can prove to be our biggest strength but also our biggest enemy if they blind us to the risks we face. But as in all things there is a balance to be achieved. Balancing risk with reward – balancing social outcomes with the commercial imperatives of the business.
Getting that balance right sits fairly and squarely on the shoulders of the boards and executives leading our businesses. That leadership has to be with the head as well as the heart to build a resilient but enabling risk framework and strategy.
Weaving our way thorugh the moral maze that lies ahead for us all in the affordable housing world is a real challenge we face. The best insurance we can get is to strive to get the best people we can throughout our businesses who understand and evaluate the risks and rewards and who can help us navigate through that maze and avoid the moral hazards.
At board-level that is an imperative but perhaps that leads us back to another of these moral hazards for our socially motivated and not-for profit distribution businesses – the payment of board members, but that is for another day!