As commercial property claims soar by 60%, Andrew Cave finds that many business claims could be avoided by better damage prevention and risk assessment.
Insuring commercial property is more precarious than it sounds. ABI figures show that last year £790m was paid out in commercial fire claims alone - 60% up from the previous year.
Additionally, the cost to businesses in terms of disruption to their operations owing to fires rose to £220m, the highest level since 1997. This year's figure is likely to be even higher because of claims from the Buncefield oil depot fire.
Floods, storms, terrorism and theft are also all potential problems. The Carlisle floods last year affected 3,500 homes and 300 industrial properties.
It's tempting to believe that the insurer's role is simply to price clean-up effectively, but some underwriters believe there is a lot more to it.
"We believe the majority of losses are preventable," says Martin Fessey, director of European market development and business development at FM Global. "We have a £50m research campus in Rhode Island, US, which helps us investigate fires, windstorms and explosions by simulating them in life size.
"We then work with clients to understand their business and the actual risks they face and help them with solutions to mitigate these risks."
Fessey believes one reason for rising property claims is that larger factories and warehouses are being built. Another is that smaller premises contain increasingly costly equipment. Tighter supply chains and a reduced amount of spare manufacturing capacity also increase business interruption claims.
The solutions start with the smallest details, says Fessey. A few extra screws in the corner of a roof might stop it blowing off in a gale, while a fully-automated sprinkler system will drastically reduce fire risk. It's about understanding your exposures and planning for them" he says.
"It can be simple things like making sure you have a supply of sandbags. There are a lot of things businesses can do."
Andrew Dear, director of technical services at loss adjuster AMG, says part of the reason for rising fire claims is a failure by insurers to adequately survey risks.
For example, AMG knows that the majority of floods come up less than 30cm so it can advise clients not to store anything below this level.
Similarly, AMG knows that a great many floods are caused not by sea or river intrusion but by water from drains backing up on to the street because drainage systems cannot cope with sudden downpours. It can therefore advise against construction near water sumps or at least high- lights the dangers for buildings that already exist there.
"You cannot eliminate these things completely but there is a lot that you can do," says Dear.
Another problem is that insurers tend to be less rigorous on risk and pricing when there is a soft market.
Phil Bird, director of non-motor and SME business at Groupama, says commercial property premiums for small businesses have fallen by 10% to 15% in the past year.
"This company does not compromise on quality or risk in a soft market," he says, "but some others do and the industry will suffer as a result."
Bird believes fire risk has been exacerbated by changes in call-out response times introduced by fire brigades in some rural areas
"There is a greater perceived focus on life over property," he says. "No one can argue with that, but it does have consequences in terms of property risk."
Fire and flood
Douglas Barnett, AXA's risk control strategy manager, says reasons for increased levels of property losses include greater use of combustible building products and large un-compartmented warehouses with no active fire suppression.
He also points to poor overall levels of fire safety management and poor maintenance of water and sewerage infrastructure that leads to damage during flash-flooding.
Similarly, poor levels of maintenance and increased use of lightweight construction increase the likelihood of wind damage claims.
"AXA is responding," says Barnett, "by carrying out traditional surveys of premises by in-house risk control surveyors.
"We also have an innovative risk management assessment product for premises and businesses that we don't visit and we are assisting policy- holders affected by underinsurance by offering a building valuation service."
Richard Owen, director of construction and commercial property insurance at Alexander Forbes, agrees that a co-operative effort between brokers, underwriters and clients is needed.
"We're seeing our clients adopt a much more proactive approach, where they are seeking guidance from their professional team," he says.
"There's also a greater focus on the analysis of claims, their trends and the risk management measures that need to be considered."
Caroline Woolley, claims consultant in Marsh's forensic accounting and claims practice, says businesses need to ensure they have appropriate business interruption (BI) cover in place.
She says: "If businesses do suffer a loss, they want to know they will recover losses and maintain cashflow to keep the business going. Bespoke BI cover helps them do this, and we take a proactive, pre-loss approach.
"Companies also face higher deductibles, meaning they take quite a lot of the burden themselves, so mitigation of loss is key."
Mitigation can also include dealing with the aftermath of a catastrophe. The Revival Company, a fire and theft restoration specialist, has developed a speed-drying system that it claims can save companies thousands of pounds in lost business by cutting the drying time required after flood damage to between one and four days, instead of weeks or months.
Managing director Graham Orriss says: "The increasing pressures on businesses in terms of the competitive environment as well as new regulations will mean that they will need to look very carefully at how insurance companies can best help them ensure a fast turnaround of any claim."
Aidan Rogerson, head of sales and marketing at Munters, another property damage restoration company, adds: "It's estimated that 80% of businesses never recover from a major disaster caused by fire, flood or water damage.
"Commercial property owners, insurers and brokers should not just focus on large-scale disasters. It's the apparently smaller risks such as leaking pipes, roof leaks or overloaded electrical circuits that cause entirely avoidable headaches and often larger-scale disruption."