Chair: What is the current state of the large corporate property market?
Graham White: You only have to go back five years and a lot of major insurance companies were retracting from the corporate market. We had the World Trade Center attack, we had Independent falling over and everybody wanted to leave the corporate area of underwriting. Yet now we are in a market that has turned around and competition is fierce. The softening is coming at us in three areas. One is pricing, one is the sort of programmes that are being put together without any understanding of the customer needs, and another is the use of capacity. We are at a position in the market where most insurers suggest they are making money. My concern is that unless you have a robust pricing mechanism around a technical price, then the problem that we saw four or five years ago could come back in the not too distant future. We have a blurring of what is a technical price and what is a market price.
David Frankland: Risk manage-ment is a key factor and there has been improvement in this. Several years ago, with people retracting from the market, there was a much greater focus on having to improve risk management to get the deal. Now, in addition to the softer market, a lot of companies have improved their general view on risk management. Therefore, you get very good prices for the risks that are out there that are well-managed. We have seen some very large UK composites who are back in the market having exited it and are keen to pick up business. Norwich Union is one which, as a broker, was not involved in the corporate business for quite a while.
Wendy Hopkins: With the softer market, everyone is going for volume and market share. The risk is that, when the rates start to harden, there will be a huge increase in rates. The risk follows therefore, that you might not retain business on renewal, and the distinguishing feature at that point will be service provision rather than price.
Stephen Foulsham: Picking up on the risk management point, what we would all like to see, in terms of business continuity, is perhaps insurers taking account of companies that are putting plans into place, since this is clearly a demonstration of good management.
Adrian Spencer: Risk manage-ment will be a differentiator when risks come to market, if climate change continues at its current rate of acceleration, we will find that it becomes a hygiene factor and we see much greater prevalence of better-managed operations on the market, with business continuity plans to support them. They will not be able to survive in certain parts of the country as prevailing weather patterns become more dominant.
Chair: Is pricing becoming reckless in this sector?
White: The problem that we have in the soft market is the desk-topping approach, which really just allows you to go past green if you have the best price. How can you understand the risk, the client’s needs, or the disaster recovery programme requirement, when you are just looking at a quick review of an account to see whether you have the right price? Price must relate to the risk, and the information that you can get from sources like survey reports, risk management reports and disaster recovery reports.
Chair: Do you think that with some insurers, head office will say, ‘we must price the risk correctly’ while the regional offices will say, ‘we really want to win this business’?
White: There is always that healthy tension – that should be the case. The problem is around knowing the customer and the trade you are in, and knowing if you have a proposition that can be sustainable in the long term. Do our customers really want to know that their business has been priced under the capability of paying out based on a gut reaction, or do they really want to know that it has been based on a long-term, sustainable capability?
Foulsham: It is also in everybody’s interest to have stability in the market. I do not think that anyone wants to move risks around the market every year or two.
Chair: Are too many brokers desk-topping larger property risks?
Frankland: Generally speaking, the risks we are talking about are all packaged and are all on a fee basis, so that you are trying to get the best deal for the customer, which includes price, cover, security of carriers, and longevity – will they be there for claims? It is always hard for brokers. We want to keep clients for as long as we can. Working with them and building a relationship with insurers always seems to work, but you are sometimes asked, even by clients, how much premium they will have to pay for certain cover. What do you do? Do you say, ‘as a matter of policy, we do not do that’, or do you give them a number? It is to be avoided because you can get it badly wrong.
Foulsham: It is a difficult time for brokers. The broker is trying to do the best for the client, but there is a lot of aggression out there among insurers. I do not think that packaged policies really lend themselves very well to the larger corporate risks, although Ace has just launched its Spectrum package for bigger businesses. Desk-topping, to a certain extent, has always been there in one shape or form.
Ray Robinson: I was an under-writer for many years and hated brokers putting something in front of me, which sometimes was not very well prepared, and then asking for a quote. You know that, possibly, they are going to renew with an existing insurer and that you are just being used. You can spend an enormous amount of time on it, so the temptation to desk-top is there, and you have to pick the ones that you think you really stand a chance of getting and go for those.
Hopkins: You are really being used as a stalking horse on price?
Robinson: Yes, but I also found in the property owners’ environ-ment we were in an ideal situation where you would work with clients over a long period of time and build up trust.
White: One thing that we notice is that, where a customer is price-orientated, they are least likely to invest in the risk improvements that you want them to.
Chair: Is terrorism cover generally available in this sector?
Robinson: The UK system is probably the envy of the world. The prices seem a bit high, but the system works.
Foulsham: As far as larger businesses are concerned, they do tend to buy it because they find it difficult to justify to their shareholders not buying it. Where I think we are seeing a bit of a problem area is the SME market becausethey are not buying it.
Hopkins: An issue that I have seen when dealing with terrorism claims, based on the old ABI standard wording, is that the ‘
‘ exclusions in respect of terrorism, or perhaps contamination, are not necessarily broad enough to address the contamination of premises through biological or chemical agents by malicious persons or by unwitting victims of malicious persons. For example as with the Litvinenko [polonium contamination] scenario. There is perhaps a need, from the ABI’s perspective, to revisit what tends to be the standard wording for terrorism cover, because we are seeing insurers coming in at the same price with much broader exclusions.
White: That is compounded when a programme requires either co-insurance or the purchase of additional direct reinsurance, because each company has a different view about their terrorism wordings and exclusions. As a reinsurer of last resort, we find that it works for us in the UK. Pool Re arrangements do exist, but in certain territories there are no controls whatsoever.
Chair: We are currently seeing some extreme weather. Is the industry pricing correctly for climate change?
Robinson: About 15 years ago, I was asked to give a talk on global warming. I spoke to reinsurers who were concerned about the soft market. They said that there is something happening out there with the weather and that they were expecting far bigger losses in the future. They were very concerned that nothing was being priced in for that. Really, nothing changed until the World Trade Center, and I had the impression that reinsurers were in control for a while and things got better. Now, it seems as though they have lost control – or at least do not have the same control.
Swenja Surminski: The message that we give out to insured parties is that they cannot expect this to continue and that they should enjoy the soft market as long as they can.
Hopkins: The emphasis is very much on working in partnership with their risk carriers and understanding their needs with transparency. There is no such thing as a bad risk, just a bad price. They would much rather know exactly what it is that they have purchased than what they have cover for, particularly in the major catastrophe events.
Allan McNeilage: Better pricing and better risk management suit loss adjusters too. People would think that this weather is manna from heaven for us, on the basis that, prior to the end of May, we were up 56% in some sectors in new work in comparison to last year, most of which was weather-related. However, the real difficulty and challenge for our business is to manage these unforeseen events that are occurring with such regularity.
Chair: Where is the ABI on the topic of climate change?
Surminski: We are now at a stage where the insurance industry is not really disputing the science behind this, and the Stern Review put it all together into evidence that there is some sort of human-induced change in climate. There are two strands to it. One is the mitigation aspect: what can we do to reduce emissions and to prevent further climate change in the future, which then involves corporate responsibility, carbon footprints, and products; the other is how we are dealing with the climate change that we are seeing now and that will continue over the next 30-40 recently launched its adaptation manifesto – a statement that summarises all the activities and actions required from government and business in terms of adapting and making sure that we are ready to deal with climate risks.
Chair: Has contact certainty been achieved with large corporate property policies?
Spencer: Contract certainty is welcomed in claims, because it means that we at least know what we have to deal with, rather than having to wait months, or even years, for that certainty to appear.
Hopkins: The FSA has recognised that the market has done great things to reach the position that it has done, but that there is further need for work to be done. The emphasis is on ensuring that the contract is clear and unambig-uous, that it is signed off prior to inception and that, returning to the point on transparency, when there are any subjectivities, you know exactly what is coming and what is not. I would be interested to hear what the market feels about whether enough has been done and whether this self-generated approach is the way to achieve reform.
Foulsham: We have all done a pretty good job. Biba has been asking for returns from its members last year. The achievement of contract on commercial classes seems to be around the 90% mark currently. The policy issue level is about 85%. I would echo what Wendy said – subjectivities are a possible area where more work still needs to be done. My feeling on those is that, if you have subjectivities built into, say, a survey requirement and a timescale, once you reach the end of that timescale, the contract is really up for renegotiation.
Robinson: I would not disagree with that, but what about the quality of the policy document and the drafting? There was a time when policy drafting was a skill which was taught. These skills are in short supply, although we have technology that should make the process much easier. I was recently involved in a case where some lawyers had been sold a policy that was supposed to cover the eventuality that some new premises were not ready on time and they would incur extra costs running their old premises. When I looked at the policy, it ‘ ‘ mentioned school fees, because somebody had just taken a school fees policy and adapted it.
“Contract certainty is welcomed in claims, because it means we know what we have to deal with
Adrian Spencer Zurich
McNeilage: The biggest difficulty that we have at the outset is the lack of clarity, particularly on the urgent instruction. Often, absolutely no attempt is made to provide details of warranties that could be very relevant to the whole process. The impact of a warranty is perhaps not that widely understood sometimes, and when we do go back and ask, ‘we are too busy to answer’ is sometimes the response.
Frankland: It also brings the client into play, in that they have the policy wording before renewal, and it is incumbent on them to check it. You are bringing them into the whole scenario. If there is something wrong, you find that out prior to renewal, as opposed to, as in the old days, six months or even longer after renewal. It also makes you start the renewal process much earlier.
Chair: What are the trends in large property claims?
Spencer: On the cost front, we are seeing claims costs increase. We are going to see some issues that will no doubt accentuate when we get close to 2012, especially in the South East, with the dynamics of supply and demand. We are already seeing issues with plumbers. Escape of water costs, frequency and average costs across the market are going up.
Robinson: Why are so many businesses going under after they have had a major fire. Is it an indictment of our industry that that happens? I read that 50% of major fires lead to companies going under. Is that because they do not have business interruption insurance or because the business interruption insurance is not adequate? Do they not have a proper recovery plan?
Spencer: My understanding of that statistic is that it is around their internal competency to manage a business continuity situation. They have not taken it as seriously as other companies. Insurers obviously have a part to play in helping them understand that statistic and the fact that it is not an urban myth.
McNeilage: The broker, of course, has a role to play here too. Going back to the claims process, if we know the client in advance of anything happening and have an understanding of their business, with the approval of the insurer, it makes it so much easier. However, there are businesses that just do not want to know if you mention business interruption.
Surminski: In the run-up to the Olympic Games we are now aware of the skills shortages That puts the whole capability of dealing with a major flood event or a major incident in a completely different light. This is something that often comes up on the skills side, and which we have been asked to take up with the government, in terms of ensuring that there are enough people out there with sufficient education and training to deal with the job required to the required standard.
White: There is a higher frequency and severity among our large losses. And even though we have improved our claims assessment and handling, even today, our major causes of losses are arson and electric – exactly the same as 40 years ago. There is something that we are not doing to change the profile of the claims that we have. With weather events potentially coming along with increased frequency and severity, this is another issue to think about. We have been at the forefront of the development of sprinkler protection for the new programme that is going ahead to completely replace all of our secondary schools over the next 10?15 years. We do have an awful amount of knowledge about arson. We support the Arson Control Bureau, yet as an industry, have not found a solution to reducing our exposure to arson losses – the biggest cause of losses.
Robinson: Going back almost 40 years, I worked for a fire manager, who predicted that the time would come when the premium for arson would be separately identified on the policy.
White: The problem that we have is that the fire brigade and police define arson in different ways.
Foulsham: Out of £700m of fire losses, half are reckoned to be arson. I know that the Insurance Fraud Bureau (IFB) has had a lot of exposure on motor staged accidents, but if you take that to the next degree, serious commercial property fraud, for want of a better term, is clearly a prime target to try to save lots of money.
McNeilage: An integral part of the investigation has to be the trends leading up to such activity.
Chair: Are fire brigades now more likely to leave a commercial building burning?
Hopkins: There is a greater onus on them to deal effectively with situations where there is a threat to life, and the industry is slightly nervous that might mean that, where there are commercial premises, particularly if they are unoccupied, there will be more total loss scenarios, because the resources will not be deployed.
White: There are pluses and minuses. The fire brigade will assess whether they go to a fire or not in the future. At the same time, they are spending more time on fire prevention.
Chair: Are greener planning and reinstatement set to have an impact on property claims?
Hopkins: There is an increasing body of regulation coming out of Europe, as well as the proposed conduct guidelines being laid down by the Overseas Development Institute which is creating pressure on businesses to have greener, more sustainable buildings. This is something that should be built into the pricing of property cover.
Surminski: If everyone is building that way, it becomes much cheaper. You also have to take into account that it might be a low or zero emission house, but how does it deal with climate risks? How does it react when it is really hot or there is a storm or a flood? That is where we see two strands: one goes down the energy efficiency route and making it sustainable; on the other hand, there is the flood resistance/resilience approach.
White: We have to remember that climate change and all of these other environmental issues are emerging ones – they are new to us. Many people in the industry, rightly feel that it is a threat. But to me, the opportunity arises from the premise that, as an insurer, we have to provide products that are available and affordable.
Spencer: It is going to be incumbent on the industry to get up to speed on the technical developments. It is almost going to become a new industry. Insurers are going to start demanding that expertise from the supply chain in terms of support and new regulations and demands that require customers to partially or fully reinstate completely new things.
Chair: Are large corporates taking disaster recovery seriously and is it now a legal requirement? Are there other legal issues affecting claims?
Foulsham: It is for brokers, in order to comply with the FSA.
Hopkins: There is not legal requirement as such, but certainly, really through pressure from the insurance industry, companies are now recognising the need to have a business continuity strategy in place. But, there are also one or two legislative developments which repealed about 100 pieces of existing regulation and became the primary fire legislation for all non-domestic premises. That transferred the onus onto those involved in the property – either the managing agents or the business itself – to conduct risk assessments, rather than relying on sporadic visits from the fire authorities.
White: There is also a director responsibility to shareholders. There was a recent change in what was called PAS 56, which is now Business Continuity Management (BCM) BS25999. This is a British standard which is hoped to become a worldwide standard, and is there to help and assist directors, in plain English terms, to build and put together a disaster recovery programme.
Foulsham: All the case studies are there. It should be on the agenda of every broker’s renewal review meeting.
Spencer: The challenge that organisations have is that they appoint a business continuity manager and they feel like they are ticking a box.
McNeilage: It is like having a health and safety representative.
Spencer: Yes, but is it lived and breathed in the organisation? Does every manager know what they have to do? Does every manager appreciate the dynamics of what happens when you are under three feet of water? A lot of box-ticking is going on at the moment in many organisations, and it is incumbent on the market to raise the game.
Foulsham: It is the old ‘it will not happen to me’ syndrome. It does not have to be floods or terrorist attacks that ‘only happen in London, not to me’, but the other things that insurance does not always cover, such as pandemic flu. These are things that will still affect your business, even though you might not necessarily be getting an insurance payment for it. I think that they need to look at it in a wider context.
Surminski: A disaster protocol is going to be launched on 24 July.The ABI has been involved, as has the Chartered Institute of Loss Adjusters, the Fire Officers’ Association and the Association of Chief Police Officers.
Foulsham: Following the July 2005 bombings in London, adjusters could not get access to the site because the police cordoned it off. There was a requirement that the industry should be allowed to get in there, get on with the work, and get these claims paid. That is where that came from.
McNeilage: It has always been the case. Others can march in and the people who are ultimately going to be paying or recommending payment of these losses have been historically precluded from being on site, so this will be very welcome. It applies to places like Carlisle too.
Chair: Do some adjusters feel that insurers’ insistence on using supply chain management removes flexibility?
Spencer: The whole area of the supply chain is an issue that we need to keep working at. We have recently introduced a building repair network for our commerc-ial customers, operating on a direct labour model, so you start to move out the subcontractors from the process and have greater control over the repair works. You also have the national coverage. We are selling that to the corporate market as a benefit and, again, moving away from price.
McNeilage: I am not totally anti the supply chain on the basis that it does offer an awful lot of advantage – the question was around the flexibility and whether or not it impedes flexibility. The big insurers should be using the right type of people. If we are able, at the same time, to work in partnership and bring in some of those that we would turn to as well, it seems sensible to me. Claims are all about trying to let people know what is happening and to make it easy for them.