Property insurance has received a boost from the buy-to-let sector where brokers can help landlords benefit from their investments. Caroline Jordan explains

Some pundits may be predicting a property slump, but the message from the insurance sector is clear: bricks and mortar remains a sound investment and we want to be in this market.

Rising interest rates and the current credit crunch have dented confidence. And, earlier in the year, a Daily Telegraph/Lombard Street research report said house prices could fall sharply in 2008, claiming that some properties are overvalued.

But investors – and insurers – are not panicking. Property remains a popular investment, buoyed by rising immigration and land scarcity. The high cost of entry to the property-owning community has pushed up the age of first-time buyers to 34, and this has helped to widen the market for rented properties.

Analyst Datamonitor stated that the buy-to-let mortgage market reached a record high of £34.8bn in 2006.

The increasing numbers of landlords owning property need a broker’s advice on insuring their valuable assets.

But, this is not safe broker territory. Recently, insurer Direct Line launched a product for residential landlords, aimed at those who have up to five properties.

So, should brokers be doing more to win this business? Barry O’Neill, managing director of Allianz-owned Home & Legacy, believes they should.

The company is a high and mid net worth specialist, selling direct to clients and through brokers. O’Neill says: “We’re about to launch a buy-to-let product to brokers in early 2008. The market is competitive, but our cover is going to be good quality, accessible and have an appropriate legal expenses element.

“It would not surprise me if some brokers had property-owning clients they were not covering. There is scope for a more joined-up approach and, over time, values can rack up. There are specialist intermediaries out there, but I think high street firms can do more in this area.”

Allianz will be underwriting the new launch and First Assist providing the legal expenses.

According to Malcolm Smith, commercial insurances manager at Groupama, schemes brokers can do extremely well in this sector. “They can sell cover online and more brokers now are launching their own websites with direct quoting facilities. There are also variations in cover between the insurers and brokers should emphasise this.

For example, we include damage by tenants, whereas some exclude it. Brokers should also check how long the property can be left unoccupied – we offer 90 days.”

Ian Page, commercial underwriting manager for insurer MMA, comments: “We deal with specialist brokers and those who are generalists, and overall we see growth in this market. We offer the product via our Broker Online system – there are plenty of opportunities for all intermediaries.”

He says prices are keen because of the soft market and competition.

“The floods will have had an impact on profitability, but generally, this sector performs well. “Buying direct may suit some, but there’s a need for advice at all levels. For example, some landlords will do repairs themselves and so are prepared to take a higher excess, perhaps of £1,000, meaning brokers can tailor cover.”

MMA recently announced a series of enhancements to its property owners’ product as part of a strategy to grow its residential and commercial landlords business.

Page adds: “There is scope for brokers to do more with existing clients and we have also found some have been extremely successful by working with landlords’ associations to develop their own schemes with us.”

Commercial investment

“‘This sector can have all sorts of problems, such as properties let to seemingly respectable tenants being used as cannabis farms or brothels’

Mike Colmans, Norwich Union

But, property investors are not tied to residential. It used to be the case that investing in commercial property was the domain of the institutions and other major investors.

In recent years though, commercial has become more attractive to smaller investors. Costs are typically higher in terms of maintenance, but as an asset class, performance has been better than equities or gilts. And, investors particularly like the fact that tenancies can run for 10 to 20 years, meaning income stability.

Clearly, smaller investors may not be looking to buy large shops, offices and warehouses, but in 2005 new rules were launched which allowed syndicates to invest – meaning much smaller stakes are involved.

Norwich Union provides cover for some of the biggest institutions and their investments – such as major shopping centres – and for small residential landlords.

Mike Colmans, underwriting manager for property owners, comments: “Confidence in property is still high. There are still many people who can’t get on the property ladder and so need to rent.

“My feeling is that newer investors need to be even more careful about choosing the right location, as we are now seeing problems in some areas, for example parts of Manchester, which have over-supply.”

Next year, Norwich Union will launch a packaged policy aimed at smaller commercial investors, which he says may suit those investors looking to diversify and invest in say, retail units.

More property investors are also looking further afield. Buying property abroad is a massive growth market both in buying to invest and as holiday homes.

Gavin Peacock, head of sales for Towergate Underwriting Holiday Homes, says his company has seen many younger buyers in particular look to invest abroad. “There are some who can’t buy here and so choose to buy a property in Bulgaria, for example.”

A specialist broker should now be able to find cover for overseas investors and Peacock explains: “Wherever possible, buying insurance from a UK insurer is going to be better. European insurers tend to have more exclusions and lower liability limits. I am surprised by often mature and educated people leaving their commonsense behind when they get off the plane and either failing to buy insurance or if they do, buying inadequate insurance.”

He says the most common mistake is falling for an estate agent’s patter and using both their insurance and legal services, which are not independent. “There may be problems with a lease, survey and of course any recommended insurance. When you’re dealing with a property that may be let out, the insurance must be watertight.”

Property investment is a solid and profitable area for brokers and few seem overly concerned about direct entrants.

Neal Rea, head of property at Stuart Alexander, says: “We’re active across the market from managing agents to commercial and large and small residential landlords. We tend to recommend the big composite insurers because they’re long term providers and the cover is better quality.

“In terms of using a broker, I think all clients may ask for some insurance advice on occasion – and, because we have so many property clients, we can pass on the benefits of our experience.”

Insurers meanwhile emphasise that property investors cover is not a licence to print money. As Smith comments: “Student lettings can be lucrative for landlords, but we’ve had cases where students have been away over Christmas with the heating off, and the pipes have frozen. We’ve seen some big claims.”

And Norwich Union’s Colmans adds: “As underwriters, we like to receive good information from the broker about the risk. This sector can have all sorts of problems, such as properties let to seemingly respectable tenants being used as cannabis farms or brothels.

“Landlords need to take their responsibilities seriously and brokers can be invaluable to their clients in explaining what these are to avoid claims being invalidated. This includes references, the lease and proper inspections.”

The importance of legal cover

Legal expenses can make a lot of sense for landlords. Typically, cover will not be included in a packaged landlords' policy and so it needs to be purchased from a specialist legal expenses insurer.
Richard Finan, director of Arc Legal Assistance, comments: "There is no such thing as the perfect tenant. We've had a case recently of an extremely wealthy individual refusing to pay rent for several months because the was in dispute over a swimming pool filter – he was eventually evicted."
Arc is a specialist in this area, and investors make up around 25% of its business. "This has never been a better time for brokers to do more in this market. We offer a range of support services from having fixed-fee solicitors, which specialise in areas like evictions, to having forms such as tenancy agreements that can be downloaded – brokers can quickly familiarise themselves with this sector."
He explains that cover has traditionally been sold through letting agents – but they are now doing less business because they want to avoid FSA regulation. "Brokers could now take this on or arrange for the letting agents to be appointed representatives." Arc is also planning to increase its business in the commercial property market in 2008.
Apart from legal expenses, landlords can also buy rent guarantee insurance. While some say this is costly, Finan says it depends on the circumstances. "If the landlord has a good spread of properties, they can absorb a tenant not paying for a few months, but if they are heavily exposed, then it's a good buy."
DAS is enhancing its Property Let policy as it enters next year, providing access to a tenant referencing service, increased limit of indemnity, greater territorial limits, extended cover for repossession and the addition of defence of appeal following a disabled tenant's request for the property to be adapted to his needs.
DAS communications officer Allan Jarrett says: "When sold as a scheme, the loss of rent cover can be applied. This is increasingly important in helping cover the mortgage repayments, especially for those where rent is their main source of income."
Legal expenses insurers also emphasise that landlords are likely to need advice on a range of issues. Jarrett adds: "Typically a landlord may want to know about how to deal with anti-social behaviour, how much notice they need to give, dealing with problem contractors and new legislation – all of which is available through our helpline."