Don’t be fooled by the first signs of an upturn in the property and construction markets. The challenge for insurers may be only just beginning
Despite floods, freezes and fears of vandalism, commercial property remains a steady favourite for insurers – much to the chagrin of those who have been trying and failing to increase rates.
Providers flocked to the construction and property market during the boom years, and most of them are still around. “It’s still a very soft market,” Zurich Insurance property underwriting manager Larry Stokes says. “There’s too much capacity and it’s hard to know what will change that, unless there is a major catastrophe or something drastic happens to the stock market.”
Commercial policies are concerned not with the market value of a property but with the cost of rebuilding it if it is damaged or destroyed, which is subject to a range of factors and may bear little relation to the headline price. A crippling recession in the construction industry, for example, means that labour and materials may be much cheaper. However, stricter building regulations requiring new methods of construction and new products have pushed up, and will continue to push up, rebuilding costs and make risk assessment more complicated.
“Issues such as green building, the use of sustainable materials and changes to traditional ways of building have an impact on claims costs,” Allianz manager of property and commercial reinsurance Peter Adlington says.
Local authority clauses, which require insurers to pay for improvements to reconstructed buildings, have also become more wide-ranging in recent years, potentially pushing up the cost of claims, adds Adlington.
There are wider factors to consider too. Changes to fire brigade working procedures, for example, will have an impact on how quickly a fire can be tackled. “Traditional fire stations are closing and consolidating,” he says. “It has nothing to do with the quality of the firemen or their equipment; it is to do with where they are and how they are allowed to respond.”
Rising claims costs
So while rates have remained largely static, the cost of claims has been steadily increasing. “Risk exposure is expanding,” Adlington says. “But the premium base is not matching that growth. It is being eroded, and the cost per pound of exposure has crept down. A true rate rise is difficult – you see people coming up with increases but if you strip out inflation and other changes, they’re not doing that well.”
Entering the recession, property insurers feared an avalanche of claims as homes, shops and offices were left vacant and vulnerable, and higher unemployment was accompanied by the customary rise in vandalism and arson.
Landlords struggling to find tenants, be they small investors in the residential buy-to-let sector or the UK’s property giants, also tend to cut spending on maintenance and reduce their insurance coverage. “Where you see less maintenance of buildings and industrial plants,” Stokes says, “equipment has a longer life cycle. So potentially there could be more losses from, say, electrical fires.”
Such fears have in part been confirmed. “It’s been quite obvious that there’s been an upturn in the number of unoccupied properties,” technical manager for property within Aviva’s commercial property underwriting team, Ian Shelley, says. “You would expect that as businesses find it more difficult to trade, an increased number would have gone into liquidation.
“From an insurer’s perspective, unoccupied properties present challenges and we want to know what’s being done about controlling that risk. It’s always a concern when risk management is seen as an area for potential cost savings.”
Mothballed construction sites
The recession in the construction industry also increases the risks, as half-built sites are mothballed. “Developers have been putting sites on hold, although there are small signs that in London, for a number of prestigious buildings, they are beginning to talk about planning applications again,” Shelley says.
But while insurers do report more claims due to vacant properties, the great increase in crimes against property has failed to materialise – so far. “Traditionally, recession very quickly leads to an increase in theft and arson, both by third parties and your own insured. While there has been an adverse move, it’s been nowhere near as marked as in previous recessions,” Adlington says.
Although there are some green shoots visible, insurers are certainly not assuming the worst is over. Austerity measures promised by the new government will inevitably lead to greater redundancies among the semi-skilled and unskilled workers, who have typically been more likely to commit these crimes.
The other group of usual suspects are young people aged between 16 and 21 who are not in education, employment or training. The growing number of these so-called NEETS is a significant cause for concern.
So, while the property market itself may have taken a turn for the better during the past three months, for property insurers the worst could still be to come. IT
Top tips for success in the property market
• Emphasise the importance of cover
Make sure clients understand the full consequences of cutting maintenance and insurance cover, especially for vacant properties. Failure to invest in security could invalidate a claim, and if the sum insured is too low, insurers will only pay out for a proportion of the damage claim.
• Be aware of post-recession issues
Recovery will bring its own challenges, as rebuilding costs, stock levels, and therefore the sum that should be insured, rise. Also look out for the results of diversification – new parts of a business may have reached a significant size.
• Learn from the past
In offices with a young team, few will remember the last recession-hit soft market of 30 years ago. Don’t forget to ask the older generation how they handled it back then.
Broker focus: Kerry London
Independent broker Kerry London has been in business since 1986, specialising in property insurance. Its property team of about a dozen people is spread across four offices. They serve clients ranging from small businesses with a single property to one of the largest retailers in the UK, and a full range of premises, from warehouses to shops.
According to senior property broker Grant Martindale, property will remain a major focus in future. “It has always been one of the key segments for us, particularly over the past few years. It’s one of the main areas we’re looking to develop and grow.”
Martindale and his team are well aware of insurers’ concerns over unsustainably low rates. “We’re seeing a dual market at the moment, where insurers are looking to increase rates on existing renewals, but don’t want to lose business. So rates are remaining fairly static. There appears to be plenty of capacity. There are a number of reasons why rates could increase, but it doesn’t seem to be happening at the moment.”
During the recession, Martindale has found himself discussing concerns over the growing number of vacant properties with both clients and insurers. “Landlords don’t have a tenant to pass premiums on to, and there’s a much greater focus on the premium when they’re paying it themselves. They’re more interested in tendering business.”
Insurers are also trying to limit their exposure to portfolios containing a large proportion of vacant properties. “Some business may take a little longer to place than it might have done a few years ago,” he says.
But while clients still focus on price, it is not the only issue when buying insurance – a crumb of reassurance for insurers determined to push up rates. “We’ve had more conversations with clients about insurers’ security over the past year or two. That’s more at the forefront of their minds these days.”