The commercial
property market was
still trying to recover from the Independent collapse when the US was attacked by terrorists. John Jackson looks back on a year of turmoil and forward to some tough times to come.

The devastation of New York on September 11 will have an immense impact on the commercial property insurance sector. However, prior to this event, rates in this sector were already hardening and were expected to continue on an upward trend for the foreseeable future.

Many underwriters believe the premium rates in the sector have been unacceptably low for a number of years and have led to negative underwriting results.

Underwriting manager for the London branch of St Paul, Andy Brooks, says the situation needs to be corrected as a matter of urgency.

He says there is a need to return to the technical rating that existed in the past. "The overall business environment is being driven by external factors, including a worsening legal situation and increasing claims inflation," he says.

"Also, the investment climate is worse than a year ago, so the overall pressure is to allocate capital very carefully and capital is a very scarce resource."

The same issues face the smaller end of the market. MMA Insurance provides cover for the smaller commercial risks, such as packages for shops and offices.

MMA's commercial property underwriting manager Marion Deacon says: "There are signs that the market is hardening. However, we believe what brokers are really looking for at the moment is service and in some cases they are prepared to accept higher premiums from companies that can deliver the consistency and reliability they need."

She says accessibility to underwriters and turn-around times for quotations are key issues, as is the personal relationship. Although MMA's rates are competitive - they have not been increased since early in the year - they are focusing on the service levels. "We are trying to get away from the `commodity product' approach to commercial property packages and introduce more personal underwriting," Deacon says.

Getting it right
The property market has been hit by particularly large losses this year, in addition to the weather-related claims towards the end of last year which are creating greater pressure for insurers to get underwriting right.

NU product manager for property owners, Mervyn Harris, says it has conducted a programme of carefully looking through accounts for renewal for some months.

He adds: "We are starting to see benefits and have put on selective increases that have taken some effect. The indicators are going the right way in that our overall loss ratio is improving.

"Our large claims frequency is dropping quite a lot, largely due to hard work by our underwriting team to ensure our account is on an even keel."

He adds: "There is a general upward trend in prices, but it is not uniform across the board, with different types of business and different performance of individual cases. We are moving towards individual pricing and using our underwriting expertise."

The collapse of Independent has had a major effect on the commercial property market.

Allianz Cornhill commercial underwriting director Chris Hanks says Zurich has taken on about £30m of former Independent business, mainly property.

He says: "Every piece of business went through a standard risk assessment and was between 20% and 40% under-rated."

The downside
One broker with mixed feelings about the collapse of Independent is David Newton, managing director of Bedfordshire-based Bervale Mead, who had a £1.3m account with the fallen insurer.

He says: "Being part of the Willis Network, we did a deal with AXA, which took on predominantly all our ex-Indie business. AXA was extremely good to us."

Newton adds: "We did have problems on claims with Independent. However, it made the market come up with ideas and gave brokers like me the opportunity to be innovative - that is what we will miss. To a large degree, the market will go back to some form of stagnation."

According to Newton, the aftermath of replacing the business has been extremely difficult because Independent was so cheap.

He says: " Independent was giving certain brokers preferential rates on new business, but the other brokers - their good supporters who had solid accounts with them - were not getting the deals."

Royal & SunAlliance (R&SA) head office property underwriting manager Findlay Smith says the Independent collapse has driven capacity out of the market. He says: "Customers have suffered because of [the collapse of] Independent. It has not helped our credibility and brokers have had to do double work, involving them in additional costs."

No winners
He says it is difficult for brokers and prospects of getting any additional remuneration for that extra work is limited, because some customers will be aggrieved they have found themselves in this position. The customer is obviously looking at who they think is responsible.

Smith says there are no winners following the Independent collapse. He adds: "There is an argument that people will come out of this stronger because we are able to deliver a realistic price, but I think that is wishful thinking.

"We are still in the midst of a hardening market and driving better pricing through, but the collapse of Independent does not help because its former clients have been hit twice in one period. So they are more price-sensitive than ever."

All these issues are likely to be intensified and any good work already done will be impacted as the sector attempts to deal with the business effects of the New York disaster.

Terrorism cover: `price can no longer be an issue'
Pool Re, the reinsurer of terrorism cover, says it is too early to predict what impact the terrorist attack on New York might have on rates, but it is likely to mean an increasing interest by customers in this form of insurance.

Recent terrorist bombs in north London have again raised the importance of even small firms having cover for their commercial property against this type of catastrophe risk.

Pool Re is the main provider of terrorism reinsurance. A spokesman said: "Our operations with individual insurers is on a bordereaux basis, which means we do not get individual risk submissions. However, we are aware of individual risk notifications that are advised to us.

"Ealing, for example, is in a very early stage of development and it was not all that long ago that loss adjusters started looking at it. We would not be anticipating that the events that took place recently would have any appreciable effect on premium rates."

Pool Re's rates were reduced by 70% towards the end of 1998 and have remained substantially unaltered since then.

Alistair Sandilands, who leads the Birmingham-based Hiscox terrorism underwriting team, says terrorism cover is the most affordable way for clients to protect themselves against this type of catastrophe risk.

He adds: "People are becoming more concerned at their legal obligations towards their shareholders' assets because directors are under a liability to protect those assets from external threats and, clearly, terrorism is now far more in the public eye as an external threat.

"Too many people think they are not a target and base their insurance-buying patterns on that belief. Most people are not a target, but look at the Ealing Broadway bomb - clearly none of the businesses hit there could be described in any way as a specific target?"

He says: "In the case of terrorism, if it is the bit people are missing out of their insurance, then they are missing out where it is most affordable. The price can no longer be considered an issue. It does not have a big impact on their insurance budget, but not buying it and sustaining a loss clearly would."

Where commercial property owners do not want to buy full-value cover, Hiscox and others offer first loss and allow clients to select locations they want to insure. This takes away the rigid requirements of Pool Re, where it is full-value only, with no possibility of selecting locations.

Justin Priestley of Control Risks Group, which advises clients on risk management for terrorist incidents, says a terrorism policy also includes business interruption and is a "sleep-easy" product.

With heightened security within the M25, particularly the City of London, Priestley believes terrorists may well go elsewhere "but you cannot put that in people's minds". He adds that many incidents in past 30 years have been in the provinces.

Cunningham Lindsey's director of commercial services for London, Mike Jones, says Ealing did not have high-rise buildings and so was not so susceptible to explosion damage. However, he said losses were significant in value terms.