Here in the UK real estate sector, landlords are having a hard time - facing a range of downward pressures in terms of falling rental income, rising costs and the general uncertainty caused by Covid-19, Brexit and the global economy.
Landlords and property managers across the commercial real estate sector seeking insurance for their property portfolios are generally seeing increases in premiums being quoted at renewal. But why is this the case?
A transitioning real estate insurance market
The market is currently transitioning firmly out of a very soft market. Previous years saw the market feature low rates and high availability of coverage – a much more attractive prospect for insurance buyers. This is no longer the case. The current market is characterised by rising premiums and a reduction in the supply of insurance as insurers become reluctant to write policies. This is caused by a variety of factors – from falling investment returns for insurers, through increases in the frequency or severity of losses, to regulatory changes that drive up costs (which are then passed on). This is impacting supply and means there are fewer places to go to with a borderline risk.
Now, markets have transitioned out of a previously softer market. This typically happens after catastrophic events such as the September 2001 attack on the world Trade Centre or destructive weather events like Hurricanes Maria, Michael and Dorian in North America. Today, there is of course the huge implications from Covid-19. Whilst the full extent of COVID-19 exposures is not yet known, the pandemic has accelerated the market’s transition.
What’s impacting property insurance premiums?
Fires and escape of water
The biggest commercial claims now result from fire and escape of water – in residential and commercial office buildings. There are many more electrical and water appliances than ever before, and with that comes the increased risk of catastrophic damage. Insurers simply don’t believe property owners are effectively managing risk in these areas.
The stats bear this out. £1.3 billion in fire related claims was paid out during 2018. As a result, insurers are demanding more stringent protections – particularly for new and repurposed buildings. Many are now beginning to be involved at the design and construction stages to ensure protections are in place. If owners can demonstrate effective leak protection, etc. insurers will underwrite good value policies. Those that can’t will face higher premiums and/or large excesses for fire and flood.
In today’s commercial real estate market, one of the biggest potential risks is that of underinsurance, with up to 80% of commercial properties being under-insured.
We all like to save money – particularly when faced with increases in annual insurance premiums across our portfolios. But reducing cover to lower the cost of the premium is a false economy that can leave you open to major shortfalls in claim pay outs. If reinstatement or rebuilding valuations are inaccurate, this could lead to inadequate cover.
An escape of water that shuts a building down, or a catastrophic fire that leaves the fabric of the property damaged beyond repair, will not only disrupt your tenant businesses, it’s something they may never recover from. Even if they’re fully covered. And the threats are very real. According to Home Office figures, fire and rescue services attended over 180,00 fires across the UK in 2018/19, with the vast majority occurring in residential and commercial properties.
Many property owners don’t undertake regular reviews of the insurance values of their assets, often preferring to use the valuation at the time of purchase for their insurance quotes. Almost inevitably, these are rapidly outpaced by inflation – assuming the valuation was accurate in the first place. Many aren’t.
While valuations take into account the principle structure, they often overlook car parks and hard landscaped areas, fencing, specimen trees and so on (dependant on the cover provided). All of which have a value and should be included in the cost of reinstatement. Repairing period buildings and those with limited access, as well as those in listed and conservation areas, also requires specialist skills. Allowances should be made for higher professional fees for craftspeople, architects, demolition experts, removal fees and more.
Of course, the best test of any insurance cover is at the time of claim. But if it’s found to be inadequate, you can be in real trouble. Your insurer may apply the condition of ‘Average’ (proportionate settlement) to the claim and you could find yourself with a significant shortfall.
So, while a broker has an obligation to ensure the client is fully informed as to their requirement to provide an accurate valuation, the ultimate responsibility lies with the landlord/owner. Failure to do so not only carries a financial risk, it could leave owners open to legal action by tenants.
Modern methods of Construction (MMC)
Modern methods of construction are transforming the way homes and commercial properties are built. While they are many benefits to new building products and methods, the risks they bring and the difficulties in understanding them, are impacting the market.
Modern methods introduce a new set of risks to the construction process. As we’ve already discussed in this article, fire is a huge risk. It’s important these modern methods offer fire resistance. However, in some cases they’ve enabled fires to spread more quickly. Timber-framed properties are especially susceptible to this, particularly during the construction phase. We saw the effects of this back in 2014 when the University of Nottingham’s £20m wooden-framed GlaxoSmithKline building burnt down. Construction firms therefore need to ensure they take necessary steps in reducing this risk during the build.
Another modern method of construction involves shifting production offsite. This introduces new risks as having one or two suppliers, rather than a series of smaller contractors onsite, can increase vulnerabilities. If one company goes under in the supply chain, it can have knock-on effects. Further issues can also arise after the builders have gone. Should a component need replacing this can be difficult if the building has settled. And, as further repairs are made and new modules installed, this can affect the safety and integrity of the building. Therefore when it comes to presenting the risk to insurers, it can be difficult obtaining information about how a property has been constructed. Furthermore, MMC buildings are typically designed to look as if they’re made from traditional materials. This also makes it difficult to assess the risk. Finally, the cost of reinstatement for partial losses can be higher than for buildings of traditional build.
Tips to present your property risk
The current market isn’t the most ideal for insurance buyers in the real estate sector. Ultimately, insurers want property owners to be responsible for their risk. So here’s what you can do to present the risk in a fair and accurate manner.
Engage early with your broker
Major portfolio owners should engage with their broker 4-6 months before renewal. This will give brokers plenty of time to talk to insurers about your risk and any preventative measures you have planned or ongoing.
Demonstrate a greater understanding of your risk profile
Take every opportunity to demonstrate a greater understanding of market developments, how modern methods of construction perform, and the risks involved. Ensuring risks are fully understood and managed will help provide the confidence to meet housing and commercial property requirements. And illustrating stringent risk management and transfer strategies will help present a solid risk profile.
Presenting your property risk profile
Your portfolio is likely to be scrutinised far more than before. Expect additional questions following the review of information. Respond to these questions promptly and in detail.
Navigating the challenging commercial real estate market
As the market continues to transition you may unfortunately be faced with increases at renewal. This is more a reflection of the fact that a huge percentage of properties are chronically underinsured, and many buildings are at considerable risk of a catastrophic event. If you can demonstrate how you’re reducing these risks your premiums are likely to follow.
If you have any questions regarding the challenging renewable property insurance market or if you’re concerned your portfolio is underinsured, our property insurance experts are helping deliver certainty to their clients’ property portfolios and would be happy to listen to your concerns.
 abi.org.uk/products-and-issues/choosing-the-right-insurance/home-insurance/fire/#:~:text=What is it?,of industry and consumer campaigns.