Why insurance products don’t work in the deposit-free renting space

Flatlay with laptop, newspaper, calculator and businessman's arms

It’s true. Taking on an insurance policy to protect a property has its upsides; landlords can let with assurance that, in a worst case scenario situation, their main business asset is safeguarded. But (and it’s a big but), using an insurance-based product as a total replacement for tenancy deposits is inherently flawed. Here’s why…

Why do landlords take a deposit?

Despite common perceptions, deposits are by no means a facility to recover serious property damages. The average UK tenancy deposit provides cover of up to 6-weeks’ worth of rent, and the average property value is around 100 times greater. Anyone can see the disparity there.

Instead, all landlords are united under one wish: to have their properties adequately and mindfully looked after, with minimal wear and tear, through their yielding lifetimes. Deposits primarily exist to encourage this by incentivising tenants’ good behaviour. They do, at times, also cover the cost of any ‘smaller’ damages. In 2017, the most common of these were flooding, cracked shower trays and spillages.

The arguments against insurance as a deposit alternative

Insurance products don’t incentivise good behaviour

An insurance product indemnifies tenants, i.e. whatever damage they cause, the repair costs are covered. Without any clear incentive to take care of their rented home, many simply get the wrong message: don’t worry about it. In the knowledge that they won’t be personally, financially liable for any repairs or other owed sums, they can grow careless.

Insurance is expensive for tenants long-term

In the LSL 2017 Tenant Survey, recognised as the most comprehensive tenancy survey in the UK market, you can see growth in extended tenancy periods of 3-5 years. This is to be expected within the current climate. As more tenants find themselves priced out of the housing market, they find somewhere to settle down and rent for a longer period.

A tenant paying an annual insurance premium would, over the course of a long-term tenancy like this, inevitably end up paying more than the average deposit amount. There’s also the issue of tenants refusing to renew their policy, leaving the landlord with an unprotected property.

Distribution is non-scalable

In order to sell an insurance product, letting agencies must be FCA-regulated, making the distribution part of this business extremely difficult and bureaucratic – not to mention open to malpractice or error. This just adds more complexity to the heavily legislative maze of insurance.

It’s also against the law for letting agents to receive any commissions, referral fees or other benefits for selling an insurance product unless they are strictly regulated.

Insurance claims are a nightmare

If you’ve been there and done it, you’ll know exactly how awful the insurance claims process is (sorry to bring those memories back). At the bare minimum, filing the claim is time-consuming, complicated and stressful. It can also take months for an insurance provider to process a claim and approve the funds.

For landlords, this means that all the while they have to cover the expense of any damages from their own pocket. They work through this period with a vague hope of being reimbursed at a later stage without ever truly knowing. And when the average claim amounts to around 1-week’s worth of rent, would you bother claiming at all?

Insurance companies never want to pay out

Though it beggars belief, insurance companies are notorious for doing their utmost to avoid any payouts. There’s no exception when it comes to dealing with landlords’ property damages.

Insurance products aren’t the way forward

Insurance-based products can be a wonderful tool to give landlords a little extra peace of mind when renting out their property to tenants. When you take a look at the small print though, it’s clear that insurance only works as add-on – not a replacement – for reliable protection. Rather than being an adequate solution to excessively high deposits, it’s simply a parallel problem.

It’s for this reason we’re making the future of renting deposit- and insurance-free.