Property and real estate was another area in a long line of sectors impacted by COVID-19. Adding to the challenges caused by the pandemic are regulation changes, Brexit and an already hardening insurance market as a result of extreme flooding in 2020.
TC: Last year was a pretty extraordinary year for everyone, but no less so for the property sector. We are all aware of the impact of COVID-19, but we have seen a host of other challenges too, haven’t we?
Mark: “It’s certainly been a difficult time for everyone and there has been a number of market issues that have directly affected the property and real estate sector.
It’s been well documented that we are in a hardening cycle of the commercial insurance market and the first real property-related issue we saw in respect of this was the flooding in the first quarter of 2020. This resulted in an influx of flood-related claims and incidents that put a huge strain on insurer resource and severely affected their bottom line.
Insurers spend huge sums of money on their sophisticated postcode flood mapping systems that are used to underwrite flood risk and very rarely deviate away from the results and recommendations that these systems offer them. The flooding in the first quarter of 2020 had a severe impact on the output of these results, leading to insurers quickly revising policy offerings on troublesome postcode areas by way of increased flood excesses or in many cases, offering no flood cover at all.”
TC: …and then COVID-19 hit?
Mark: “Just as insurer claims departments were starting to make progress on the settlement of these flood claims, yes, the pandemic hit. It has had a huge effect on the global economy, meaning that insurers’ investments are struggling, with low interest rates seen as a result of the stock market losses. Insurer claim reserving and claim settlement figures are much higher than anticipated, meaning operating profits are obviously lower.
Solvency II regulations now require insurers to hold additional capital to cover potential losses and then throwing Brexit into the mix adds even more complications. Insurers have also had to invest in areas of their businesses that they were not budgeting for, such as changes to technology to support remote ways of working. All of these issues have meant that insurers have had to go back to the drawing board in terms of setting their financial targets and overall strategy.
Unoccupied property has been a direct consequence of COVID-19 for the property sector. Two sectors that have previously been ‘bread and butter’ to insurers, retail and hospitality, have now become problematic due to the continued uncertainty that COVID-19 has had on the tenant’s ability to trade and occupy premises. The FCA Business Interruption Test Case has also contributed hugely to uncertainty in the market, especially with the recent ruling in favour of policyholders. We are currently in the process of reviewing the findings from the case with our legal representatives to ensure we continue to give our clients the best advice moving forward.”
TC: Are there any other factors contributing to these market issues?
Mark: “We are seeing some market issues relating to the fabric or construction of buildings. There is still a huge amount of insurer resistance to non-LPCB approved panelling or cladding as a result of Grenfell, with insurers now wanting to know exactly what these panels include or contain. We have also encountered some challenging insurer responses in relation to modern methods of construction, such as built off-site and modular type builds, where underwriting teams do not yet have the expertise to understand these risks fully.
The above issues, primarily flooding and COVID-19 means that reinsurance capacity is shrinking and rates increasing. Insurer operating profit levels are reducing due to increased claim settlement figures and future consideration for projected long-tail claims. As a result, insurers are pushing premiums, tightening terms, withdrawing from certain markets and generally being more restrictive in their appetite.”
TC: Against that background, how does a property owner make their portfolio of risks stand out from the crowd?
Mark: “Obtaining favourable property insurance terms in the current market may sound daunting, but by following some simple guidelines prior to placing cover or prior to a renewal cycle, the insurance buyer can put themselves in the best possible position to obtain favourable terms.
My first piece of advice would be getting prepared and starting the process early. I appreciate that everyone is busy and external factors mean that it is not always possible to have lengthy lead times, but with the current market state, we need as much time as possible to engage with the market and sell the risk to insurers.
Underwriters’ first response to quotation requests is now typically no. There is also the added factor of longer response times from insurers who’s underwriting teams may be smaller or less resourced as a result of reduced budgets. Some insurers are still struggling with the impact of remote working and are simply not as efficient whilst working from home. Essentially, in a market where capacity is low but the number of enquiries received by an underwriter remains high, the best risk presentation wins the underwriters’ time.
For us as brokers to fully understand the risk and do the best job possible, we would typically ask for two or three months’ notice, more if possible, on larger portfolios where we can look to engage with the insurer early and potentially use pre-cover surveys or other trading methods to obtain best terms. However, although this is the ideal scenario, with our in-house delegated authority property schemes and facility arrangements with leading insurer partners, our specialist teams are also geared up to turn around quotation requests quickly when required, including those with funding and banking requirements and/or legal indemnity considerations.”
TC: Is there anything that the insurance buyer can do on their end to prepare?
Mark: “To have the best shot of obtaining favourable terms, it’s important that you provide robust risk detail about the property or portfolio. This is something which we guide our clients on regularly along with taking the time to understand our clients’ businesses fully, to help identify the additional information that insurers will require outside of the traditional proposal form. The more relative information received about the security of the building, construction, occupancy, risk management measures and so on will help us present the risk in a more favourable light to insurers.
At this stage, it may be worth considering the implementation of additional risk management controls, such as improved health and safety features which will again please insurers. Underwriters are asking for far more risk information than ever before and the Insurance Act of 2015 puts the onus on the policyholder to provide the relevant risk information required.
It’s also important to get the property reinstatement sum insured correctly. The percentage of under-insured real estate in the UK is alarming, at around 79% of property. In the event of a claim, if your reinstatement sum insured is too low, ‘average’ will be applied by the loss adjustor, meaning that your claim payment would be proportionately reduced and therefore insufficient to meet rebuilding costs. The other side of the coin is being over-insured which means you are giving away unnecessary premium, so it works both ways.
Lastly, whilst it may seem proactive to take your insurances to market on an annual basis, in this current market cycle especially, we may only encourage this if you have a specific issue with your current provider. Strong and longstanding relationships are preferable to underwriters who may decline to quote risks where the policyholder is seen in the market as a ‘shopper’. Insurers will often reward businesses that market in longer intervals of say, every three years, by offering attractive terms, rather than reward those who go to market every year.”
TC: You pride yourself on providing a boutique property broker service in London, Mark. Can you share some examples of the more effective solutions that you have developed?
Mark: “Aside from the core broking services, we try to ‘think outside of the box’ and focus on more niche, added-value and tangible solutions to help our clients navigate market issues.
In instances where the market will not provide terms where there are problems around flood cover and water management, we have access to a specialist product called Flood Flash that offers an alternative to the traditional flood peril insurance by way of a mobile-connected sensor system that is installed at the property. The sensor reports any flooding over a pre-agreed trigger-depth and the provider pays a chosen claim settlement amount to the policyholder. This effectively gives the client the same piece of mind that traditional flood coverage would.
With the marketing hardening further because of COVID-19, we also look at creative ways to offset premium increases and tightening of terms. For larger property portfolios, this could include moving away from traditional one-insurer property owners policies to a more ‘layered’ style programme, with the risk split across a range of insurers, thus increasing appetite in the market. We also advise on adjusting excesses or deductible levels on a programme, to obtain further premium efficiencies.
I spoke earlier around the difficulties with non-LPCB approved composite panelling and cladding. When we are advising on a risk where the client is unclear what cladding is in situ from the construction files, we always advise our clients to seek the services of a qualified cladding expert who can offer a survey and report determining the exact type of cladding. We have seen instances where the front-end cost of this service provides further clarity to insurers who go on to offer better terms, offsetting the cost of the service.
We have an award-winning in-house claims team with a host of loss adjustor experience that are currently navigating our clients through the FCA ruling and what this means for their policies. Further to this, we offer Claims Defensibility Health Checks that help support our clients in building a strong health and safety culture within their organisation.”
TC: You touched on it there, but can you explain how other Thomas Carroll Group services play a part?
Mark: “We look to take a holistic approach to risk, rather than focusing on the transactional insurance side. Our Group services also include health and safety, HR and employment law advice, wealth management, employee benefits and personal insurances. Our risk management solution is comprehensive.
We regularly offer Confidential Audits and Risk Mapping exercises to help clients identify and manage overall business risks, reducing the amount of risk transferred to the insurance market and creating a bespoke programme for their needs. We always work with our clients to help control the impact of internal and external factors on their businesses.
From a lending obligations perspective, we carry out due diligence audit services for several clients to ensure compliance with finance agreements, specifically in relation to insurance. Lastly, we have a specialist, legally-qualified legal indemnities team who can advise around restrictive covenants, right to light, defective title and so on. This way, our clients receive impartial advice and have access to the broader legal indemnity market through our established relationships and buying power, rather than having to go to the insurer direct.”
TC: …and how do you avoid under-insurance or over-insurance?
Mark: “I mentioned earlier the importance of obtaining the correct reinstatement sum insured. We have partnered with a company called Rebuild Cost Assessment Ltd to offer our clients a cost-effective solution to undertake this exercise. RCA Ltd are RICS qualified surveyors and are able to assist with all types of property risks across many sectors. Again, a small cost on the front end may not only save on premium in the long run but will undoubtedly give you peace of mind that your insurance programme is on correct basis.”
TC: Thanks Mark, some interesting ideas there that will no doubt be useful to many operating in the property sector.
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Need Advice? Contact Mark Slade Today
Mark is a Commercial Insurance Account Executive at Thomas Carroll. He is an ACII Chartered Insurance Broker and specialises in placing and managing business and real estate risks across a wide variety of sectors. If you have any questions, please call 077121 50843 or click here to arrange a meeting with Mark.