Bernard Mageean says UK property insurers must remain focused on fundamentals of underwriting.
For insurers grappling with the consequences of the soft market and the continuing threat of a tough trading period in the UK, another worry may be the last thing they need. But the inherent nature of property risk is changing and underwriters need to adapt their approach.
An upturn in the cycle could prove to be little more than cold comfort if insurers have not got the underwriting fundamentals right. With the UK property market at present, those that are assuming it is a case of business as usual while waiting for rates to turn could be in for some unwelcome surprises.
Due to a raft of factors, the landscape of the UK property sector is altering dramatically in a way that means it is far more uncertain than it was a decade ago and rates and underwriting appetite need to change.
Key changes impacting the property market are: globalisation; the change in the industry mix; industry interdependency; technology; climate change; planning and building techniques; and crime and arson patterns.
Separately, continuing demand for commercial and domestic property has led to more building in problematic areas such as flood plains or brownfield sites. Such developments not only mean that property risks are becoming ever more exposed to natural perils, but also that the geography of urban areas is altering. For instance, developments on inner city sites can adjust the balance and mix of local populations and commercial activities in a manner that has a significant impact on the pattern of crime statistics.
As a result, moving ahead, underwriters are likely to need to place increasing focus on the questions of geography – in its broadest sense – and less on the question of the trade being carried out.
At the same time, the globalisation of business and the move to outsource non-core business activities has led to a far more complicated picture on commercial property risks. Understanding the chain of interdependencies which now exist for many businesses, especially when it comes to customers’ and suppliers’ extension cover, is a key part of the equation.
However, it is far from clear that rates have yet been realigned from the historic beginning-to-end business model to reflect this new business reality. For underwriters to succeed they need to genuinely underwrite their risks and adapt to the way the market is changing.
On the plus side, however, for those insurers that are prepared to make the necessary investment, there is now a new generation of mapping tools and other similar analytical mechanisms which means that underwriters are better equipped than ever to understand, select and price risks.
Equally important, today’s dynamic tools enable underwriters to swiftly identify potential gaps or exposure hot spots in their books of business, so better positioning them to adjust rating to attract the necessary quantity and quality of risk to build balanced portfolios.
Accordingly, the current period of challenge is also one of real opportunity for insurers with a genuine integrity of underwriting – particularly those that concentrate on developing skilled and properly equipped underwriters whose primary objective is to find the right solutions at the right price.
Truly empowered underwriting is not just about managing the cycle. It is about holding your nerve, about being prepared to examine risks afresh and about knowing when to say ‘no’ as well as when to say ‘yes’. Risk profiles may alter, knowledge sets may develop and pricing analytics may evolve, but those underwriting fundamentals never change.