The property insurance market continues to harden in 2021

Both the residential and commercial property markets have steadily hardened in recent years, resulting in premium rate hikes every quarter since Q3 2018, along with an increasingly restrictive risk appetite and more stringent terms from insurers.

Unfortunately, this trend is continuing into 2021. The hardening market trend reported in the Acturis Commercial Broking Index last year has continued into the first quarter of 2021, with commercial property owners’ premiums rising 5.1% compared to Q1 2020, the largest hike across all of the commercial insurance classes

Policyholders with poor loss control practices; who’s property is used for higher risk commercial activities; with property located in flood-prone areas, or with construction including flammable cladding may face premium increases in excess of 50 per cent or even struggle to find cover at all.

Drivers of the “hard” property insurance market

Dan Berry, Chief Underwriting Officer of GRP Underwriting sums up some of the key factors driving the hard property insurance market as follows:

Property premium rates have historically been too low

Property insurance has been under-priced for years. This has resulted in many insurers’ Combined Operating Ratios (a ratio of claims, commissions and insurers’ expenses to premium income) exceeding 100% - so the cost of providing property cover has been higher for insurers than the premium received.

This situation has been exacerbated in terms of insurer profitability as global interest rates have remained at rock bottom, minimising the investment income insurers obtain from the capital they hold.

 Natural disasters and large losses

Large loss activity has been driven by more frequent and severe weather events over the last few years and this more volatile pattern looks set to continue. For example in 2018, the UK was battered by ‘The Beast of the East’ weather event. As a result, approximately £328 million in property insurance claims were filed in Q1 2018.

With historically low property rates and reserve releases from prior years depleted, insurers are now taking the opportunity to increase rates and build a “large loss fund” to provision against future large and event losses.

Storms, floods and other natural disasters can wreak havoc on businesses and property, and the impact on the insurance market and therefore premiums, can be significant.

COVID-19 and property cover

The coronavirus pandemic has resulted in many commercial properties having to be shuttered and left vacant for extended periods. During the various periods of lock-down, non-essential businesses may have been left unattended leading to an increase in escape of water losses and vandalism which may have gone undetected for extended periods of time.  Whilst this will be a contributory factor to rising rates in the commercial property market it is worth noting that claims frequency for home insurance is down during the pandemic as people have been at home more often meaning certain losses don’t occur or are detected earlier.

Modern methods of construction

Modern planning requirements and the development of fire detection and prevention systems have had a positive impact on fire losses in terms of frequency and severity meaning catastrophic fire losses are less of a feature now than they were historically. However, modern methods of construction such as timber frame and use of cladding have led to some unexpected loss activity and this will impact insurers’ appetite and the premium and terms they are willing to offer.

Inflation in the costs of building materials

A number of factors including a weak pound and lack of skilled tradesman linked to Brexit and the pandemic has resulted in inflation in the costs of building materials, with these costs flowing through to claims costs for repairing damaged buildings.

How to minimise the impact of the hard market on your insurance terms and premium

Start your renewal process early

Work with your insurance broker to start your renewal process well in advance of your renewal date. Being thorough and timely is vital to ensuring that your risk presentation is fully understood and evaluated adequately by underwriters.

Be prepared to provide extensive information about your property

Underwriters are typically looking for additional information to help them in pricing renewals, so be prepared to provide extensive information about your property, for example structure details, alarm specifications and evidence of fixed wiring and electrical installation inspections.

Businesses who are able to provide this additional detail give underwriters the opportunity to apply discounts to moderate premium increases, whereas underwriters will need to assume the worst case scenario where these answers aren’t forthcoming.

Ensure that your property sums insured are accurate

Under insurance has been widely recognised as a major challenge across the insurance industry. Based on the experience of rebuild valuations specialist Rebuild Cost Assessment Ltd, 80% of buildings (commercial and residential) do not have the correct building sum insured. The average degree of under insurance is 40%.

Underinsurance represents a real risk is to property owners. A significant underinsurance could result in “Average” being applied to a claim with a proportionate reduction in the claim payment. If the underinsurance is significant enough it could even result in the insurer taking the position that they would not have insured the risk had they been aware of the correct sum insured, and turning the claim down. A recent professional valuation will give insurers confidence in the quality of the underwriting information they are using, and that they are charging the right premium for the risk they are covering.

Implementing risk recommendations is key

Ensure insurer survey recommendations are completed, and work with your broker to present the loss control measures you have in place. Taking the appropriate steps to reduce your risks whenever possible is likely to make your business more attractive to underwriters.

Contact your local GRP insurance broker (link to office finder) for further advice on how best to present your property insurance renewal.