John Hancock reveals why property insurers need to get wise to the implications of modern construction methods and global warming
If you can manage change, say the management gurus, you have grasped one of the main keys to success.
This is highly relevant for property insurers entering the twenty first century and facing change in two core elements of their risk calculations.
Building methods
Modern methods of construction (MMC) and materials have rendered centuries of accumulated experience in property risk irrelevant.
Changes in the way properties are constructed fall into two categories, reflecting materials and components, and methods.
There is less understanding of how to repair some modern building components and it does not seem be as easy as for traditional building methods.
Phil Hill, regional manager at Cunningham Lindsey, neatly sums up the concerns: "After fire damage, you cannot clean UPVc windows, whereas traditional wooden frames can be redecorated."
A controversial feature of MMC buildings for insurers has been the composite panel, in which exterior and interior cladding surfaces sandwich an inner filling, often forming the whole of one elevation of a building.
In the 1960s and 1970s the inner filling was sometimes of a material that could smoulder on, unseen, after a fire had apparently been put out. The heat generated could damage any adjacent load-bearing structure with a serious risk of collapse.
For these reasons, some fire brigades would not allow their personnel into buildings that contained composite panels, with the result that a containable loss became a total loss.
The use of air conditioning in modern commercial buildings also means that smoke can spread throughout a building even if the fire is in just one room.
However, as Joe Martin, executive director for consultancy at the Building Cost Information Service - part of the Royal Institute of Chartered Surveyors - reminds us: "While, with a panellised wall, components may hang on a frame, those components will often be the same as in a traditional building."
Factory-assembled units also often include easier wiring and piping runs than in traditional buildings. So while repairs may require different techniques, these need not necessarily be more expensive.
Factory parts
The other element is the assembly of the building itself, with increasing numbers of modern properties comprising large factory-assembled components.
Any new assessment of risks will need to balance both the resilience of MMC against common perils with the potential cost of repairs when claims do arise.
"We make no differentiation between buildings (constructed) using either modern or traditional methods, we assess each construction (on its merits)," says John Heaney, UK commercial underwriting manager at Hiscox, making the case for strong underwriting on every occasion.
Ashley Canning, chief executive of broker Keelan Westall, says: "As cases involving MMC properties have come up, we've had to go on the internet and talk with architects and surveyors to build up a library of knowledge to use when discussing modern methods buildings with insurers."
Assembling a library on a case by case basis like this avoids devoting significant resources to acquiring knowledge for knowledge's sake. It also ensures that the broker soon compiles a resource relevant to the cases typically handled, which will prove a worthwhile investment of time for any broker in this market.
But brokers can also gain useful information by talking with the architects, surveyors and builders involved in any specific project for which they are asked to arrange cover.
An industry-wide resource would also be invaluable in allowing them to access the information they need, enabling them to talk to insurers about specific risks.
MMC is not covered by any of Biba's current information schemes (nor is climate change - see below), but a Biba spokesperson confirmed: "We are always open to new ideas for schemes that would assist members in their work and we actively seek their suggestions as to the new schemes that would be useful".
The Building Research Establishment offers a further source of research information for those needing to know more about developments in MMC.
Natural environment
Less easy to calculate is the cause and likely development of changes in the natural environment.
Climate change resulting in more extreme weather events and a steady change in long-term weather patterns has upset the assumptions that underpin risk.
The ABI's 2004 report, A Changing Climate for Insurance, explains: "Weather risks are increasing by 2% to 4% per year on household and property accounts due to changing weather. Claims for storm and flood damages in the UK have doubled to over £6bn over the period 1998 to 2003 compared to the previous five years, with the prospect of a further tripling by 2050."
Malcolm Tarling of the ABI sums up the approach: "The ABI continues to assess the challenges of modern methods of construction and climate change, and how insurance can continue to be as widely available as possible given these future challenges, both of which require a partnership approach involving the government and other interested stakeholders."
A growing number of properties in the UK are situated in flood risk areas. In Thames Gateway 250,000 new houses are planned by 2015, a good deal of which will be below the protection of the Thames Flood Barrier.
Allister Smith, property risk manager at Norwich Union confirms: "Insurers are by no means certain of the flood risks involved."
Insurers have agreed to offer cover until 2007 on properties affected by recent increased incidence of flooding. After this time underwriting will take into account whether the government is implementing a flood defence plan for the area where the insured property is sited.
Challenges ahead
Property insurance has to come to terms with a whole range of changes.
The tried and tested methods of risk assessment may not be able to draw on centuries or even decades of experience when addressing MMC or climate change.
However, the market as a whole will not change overnight to MMC. And the weather, though it is changing at an unprecedented rate, is still progressing to a pattern that can be charted.
Property cover will be challenged by modern methods and climate change, but traditional common sense underwriting principles will manage the changes.
USEFUL ASSOCIATIONS AND ORGANISATIONS FOR INFORMATION ON MODERN BUILDING METHODS
- Association of British Insurers (ABI)
www.abi.orguk
- British Insurance Brokers Association (Biba)
www.biba.orguk
- Royal Institute of British Architects (RIBA)
www.riba.org
- Royal Institute of Chartered Surveyors (RICS)
www.rics.org
- Building Cost Information Service (BCIS)
www.bcis.co.uk
- Building Research Establishment (BRE)
www.bre.co.uk