Europe is the answer

You could call it a kind of continental drift. The latest version involves not plate tectonics but large property owners flush with funds to invest in property but are turned off by Britain's high property prices, rising interest rates and low yields.

Europe is the answer and that's where many top property investors are heading. With the potential for every major investment to be underpinned by insurance, the country's underwriters are on their way too.

James Purvis, director of property investors at Royal & SunAlliance, confirms: "It is definitely our experience. In the UK, there are very low yields on some properties and quite a lot of our clients see Europe as a viable alternative. This creates a need for an insurance response that the market is trying to address."

A recent survey by Zurich Property Investors backed up this anecdotal evidence, with 14% of UK property investors saying they were actively considering investing in property overseas.

Of those looking abroad, 44% thought Western Europe would provide the greatest rental yields. Central Europe was preferred by 29% of investors.

However, 30% of respondents were unsure whether their insurer could cater for their international property insurance needs.

Richard Elliott head of property investors at Zurich Commercial, says: "Clearly, many property investors are considering expanding their portfolios both in the UK and internationally. They need to have the peace of mind of knowing that they have the right insurance in place.

"This is why we have a policy that automatically covers newly acquired premises up to £1m or 10% of the overall portfolio sum insured. We believe this enables owners to take advantage of a high-yield opportunity without worrying too much about arranging insurance."

Michael Phillips, property owners manager at Axa UK, says: "This is definitely a trend. The sector is so buoyant that some property funds are finding it difficult to spend all their money in the UK and you are seeing funds being set up specifically to invest in European property."

Phillips adds: "I don't think premiums will rise. At the moment, only a few insurers are covering this market. It tends to be the bigger European insurers."

Purvis agrees. "Overseas, there are local regulations and local taxes," he says. "You need certain skills and experience to write international cover. I do not see that many insurers having a robust proposition in Europe.

"We are doing it in the right way. We are not going into the segment over-promising and under-delivering which is what the insurance industry has tended to do in the past. We do it in a very gradual and integrated way.

"You talk to the property companies and they are not seeing a strong correction in the UK property market any time soon. They are looking to a long-term play in Europe because they see better opportunities there than in the UK."

However, says Elliot, there is a risk attached to seeking the higher yields in Eastern Europe. He says: "In old eastern bloc countries like Poland and the Czech Republic the yields are much bigger. There is more risk too of course but there is a lot of money chasing foreign properties."

Local markets

Despite the uniformity of the 25-nation eurozone, property insurance is still a localised business. Elliott explains: "Different countries have different needs and different conventions. We often have to get the basic cover locally so a client will have a policy issued in the country where the property is located.

"Then we can top up any shortfalls or additional needs back in the UK market. It is not having an effect on premiums because the premium we charge in a particular market reflects the going rate in that market."

Nigel Todd, UK real estate practice leader at Marsh, says: "There is certainly a lot of activity in Europe but it is not particularly new." He says traditional property owners still look to the UK for most of their investments, while financial institutions in Britain and Germany have been investing in European for the past 10 years.

The more recent activity, he says, comes from large property companies putting a tentative toe in the water in Europe.

Todd says: "The areas that have been hot for property investment recently are Spain and Italy. France was hot but that changed with a new tax regime."

He agrees that European property insurance premiums are unlikely to move, despite the surge in activity.

He argues that central European markets already have their own highly developed insurance markets and British underwriters often insure through European joint ventures.

London market

London still has a key role to play because American investors in Europe insist on underwriting there. In addition, he points out that outside Spain, France and Germany, in Europe it is impossible to obtain locally-written terrorism cover.

Todd expects Europe to remain a key area for property investment but says insurers need to adjust their underwriting models, according to the territory they are covering.

He says: "There are different catastrophe exposures in Europe. In Holland, there is a big exposure to flooding; in France it is storms and floods.

Germany tends to get flash floods and in Italy and Greece there is an exposure to earthquakes."

The potential for bad weather, though, is dwarfed by the problems of hurricanes and tornados that US insurers have to deal with and Todd says this is leading large American insurers to test the European property insurance market.

"AIG and Ace have always had the capability to write property cover in Europe but not the appetite," he says. "Now they are developing an appetite."

As for the future, Todd does not believe the boom in European property insurance is a bubble waiting to be burst. "There is no reason for premiums to go either up or down in the next few years unless there is a significant catastrophe. This is not a stressed market," he says.