United Kingdom

Property Insurance and Coverage Predictions

Emma Vigus, Business Development Director in the Aon Real Estate team discusses the key trends in investment property insurance with Dean Cloke, Head of Property Real Estate Insurance at Zurich.

What’s your view on insurance rates and coverage over the next 12 months?

Insurance rates

The last couple of years were challenging for the Real Estate property insurance market. Insurance rates for the sector have been historically too low with underwriting performance being poor due to volatile fire losses and attritional escape of water losses. Further upward pressure on rate is being driven by claims cost inflation and increasing levels of information regarding building construction. Water damage claims continue to cause concern although we are seeing improvements in risk management as landlords are increasingly aware of the impact water damage claims have on their portfolios and claims experience. Residential is an asset class which is firmly in the spotlight from the government, regulators, and insurers. The impact of these various dynamics on leaseholders needs to be managed in a sustainable and collaborative way.

Covid had a dramatic effect on the Real Estate property segment and required Real Estate investors to re-assess their investment strategies. This has led to a shift from office and retail portfolios to investment into logistics and warehousing which is generating higher investment yields for investors. This shift has been very fast paced and speed of clients’ acquisitions result in typically limited risk information being provided to understand true exposure above and beyond the general increased volatility of a logistic asset or warehouse exposures.

Cost volatility

Inflation is creating increasing claims costs. It is also putting upward pressure on building reinstatement costs leaving insureds exposed to the potential dangers of under-insurance.

We highly recommend all clients consult relevant professionals prior to each renewal to determine the appropriate inflationary uplift to apply to their buildings. As part of the insurance renewal process, we are now seeing inflationary uplift to declared values forming a significant part of renewal negotiations as the total cost of insurance including other aspects such as rating increases and commission come together to create a finalised position.

Policy coverage

Reviewing policy language to ensure it is concise and unambiguous has been a major area of focus for the insurance industry over the last two years. Consequentially Zurich are not alone in the work we’ve undertaken to ensure that clients understand what they’re buying and how the policy will respond in the event of a claim. The world is moving at a rapid pace, and we expect to adapt and evolve over the coming years. There are also notable legal challenges regarding Covid coverage under various insurer and third-party policy wordings and the outcome and precedent set through these various legal cases will continue to influence and evolve our thought process on policy wording language.

What can clients do to manage insurance spend?

There are many aspects that contribute to insurance pricing both at a case specific and a wider macro level in terms of market cycles. Zurich aim to offer consistency of pricing however where information regarding assets and importantly how they are managed is not forthcoming it makes underwriters take a cautious view of the risk.

We are very appreciative when clients work with us to improve the quality of information provided both at renewal and at acquisition stage. This enables underwriters to have a better understanding of the risk and price accordingly.

Zurich’s capacity deployment is linked to the level of underwriting information, as well as the hazard level. (For example, a densely packed unsprinklered warehouse will be viewed as more hazardous than a properly constructed and protected office building). Therefore, it is not just pricing that can be impacted by a lack of information as capacity can be scaled back either by a reduced percentage share of the risk or the underwriter not feeling comfortable to deploy any capacity.

The challenge posed by poor quality information at renewal is exacerbated when a portfolio undergoes a significant and rapid switch of focus, for example a move out of retail into logistics. Our customers can mitigate this issue by providing us with detailed and timely information about their strategy and their approach to managing risk. The key is working in partnership with your broker and underwriter so we all understand the change in approach and how best we can work together to ensure terms and conditions remain consistent.

A strong long-term relationship, predicated on regular communication between the insured and the underwriter, is also important. It allows the underwriter to become personally invested in the relationship and develop a solid understanding of strategy, pipeline, and risk management processes. Clients that recognise the value in developing a long-term partnership with their insurers can typically expect improved results at renewal, a faster underwriting process and proactive advice on management of both risk and insurance spend.

What can be done to reduce insurers’ concerns regarding Cross Laminated Timber

It’s a hotly debated topic and one that we’re frequently asked to comment on. Many clients are understandably keen to improve their sustainability footprint but so far we’re not seeing the dramatic move towards deploying alternative materials that we expected or the level of media interest it has generated. I think that reluctance stems from two concerns: firstly, uncertainty regarding the performance of emerging materials when used at scale and secondly, the availability of insurance. I think the cladding failures highlighted by the Grenfell tragedy weigh heavily on the minds of investors who are understandably keen to avoid any association with similar materials failures in the future.

From an insurance point of view, underwriting difficulties arise because we don’t have many tangible examples of how Cross Laminated Timber (CLT) or other materials deployed to improve sustainability, perform under stress and that makes us cautious. That should not suggest that we’re unwilling to engage. For example, in the US we’ve recently undertaken a CLT assessment and analysis project in partnership with some customers in the construction sector. We’ve learnt from that process, and it has resulted in the development of a timber construction insurance proposition which will further enable Zurich to learn more regarding this emerging construction method.

However, in the UK we are lacking the rigorous standards, underpinned by scientific evidence, required to alleviate the insurance industries concerns and that creates a lot of uncertainty. To mollify insurers’ concerns, investment needs to be made by the construction and real estate sector in collating technical data and formal testing which are prerequisites to the development of the robust standards insurers require. We must learn from the past to improve the future.

Emerging Risks

There’s a lot of existing risk arising from the approach to construction over the past 25 years, which is still emerging and is neither fully understood or properly managed. As an example, we’re seeing claims arising from fires where there’s no cladding present, where the level of damage incurred is significantly worse than expected because of deficiencies in the construction process. Those issues will continue to emerge and will take decades to fix, if indeed they are ever fixed.

We’re also seeing issues arising in relation to the use of electric batteries and solar PV panels. These need to be addressed through the development and adoption of consistent standards relating to storage, control, and management. The grey area that often exists between Landlord and Tenant in leases relating to responsibility for installation and maintenance also requires addressing. This is one area that working in partnership with our risk engineering team can really add value to an investors approach to risk management. We have partnered with clients to give them support on how to implement this across their portfolio’s.

Whilst it’s a constant rather than emerging risk, the weather is becoming ever more unpredictable. The scale of catastrophe losses in the US in 2021, where they had over twenty catastrophe events greater than $1billion, is unprecedented. This trend is being replicated in Europe where we’re seeing increasing losses arising from wild-fires, flash floods and tornados and those losses often arise in regions with no historic examples of extreme weather events. In July 2021 the flash flooding in London was following record rainfall and this caused significant surface water flooding and led to unexpected losses for many clients. The approach to managing key plant and electrical systems in basements was a key learning from this event.

Weather related claims are going to increase and exposure to the future impacts of climate change will come under increasing scrutiny during the underwriting process. With regards to insurance cost and coverage, insureds must understand that what’s happened historically may not be an accurate indication of future risk and should, therefore, be alert to the possibility of terms being imposed due to predictions regarding future weather-related losses.

In extreme circumstances relying on insurance to cover weather related losses in the future may be less and less of an option. So, investors should work more closely with the insurance industry, to understand its views on the impact of climate change when undertaking due diligence particularly at acquisition stage. Zurich welcomes sharing our insights in this area with our customers.

Working with your broker and insurers risk management teams to understand your exposure to natural catastrophe is a really good starting point. This can then highlight areas to further understand and focus specific risk engineering assessments and improvements to ensure if or when the building suffers damage it is as resilient as it can be for the tenant, landlord and insurer.

The importance of the Property Manager

There’s a clear correlation between the quality of property management and claims performance. Landlords have limited scope to fundamentally alter tenants’ behaviour but the property manager on the ground, who sees tenants every week, can. Tightly controlling property management via regular monitoring, analysis and benchmarking of performance has a tangible impact on claims even in heavier industries. Following on from this, we will take a cautious underwriting approach where investors deploy multiple property management firms across a single portfolio without any alignment in terms of management standards and protocols. This is another area where regular dialogue and communication between the investor, broker and underwriter can be very impactful. This type and level of information is not frequently shared but can really provide comfort to the underwriter in terms of consistency of standards and management across the portfolio.

What impact is the increasing importance of Environmental, Social, and Governance having on Zurich’s approach to underwriting?

Zurich is very strong in its commitment to sustainability. It’s an area where we’re aiming to differentiate ourselves from our peers with regards to both our investment strategy and our organisational objectives. As an investor and insurer, we recognise the role we play in what is essentially a virtuous circle, so our corporate commitment carries through to our approach to underwriting, creating a need to partner with companies that mirror our values.

ESG is naturally a very important topic for real estate clients, and we are beginning to see this translate into tangible plans for achieving their targets on their portfolios.

Over the next year we’d expect to see landlords starting to think more about how they work with tenants to help them improve their own footprint to mutually meet ESG objectives and frameworks. We appreciate that Landlords have a limited ability to impact tenant behaviour however we can only see this focus increasing on both existing assets but also on new acquisitions.

This is one area where we expect to see dramatic change over the coming 12 months. We believe that all areas of the property industry will have to adapt and evolve to a wider societal demand for ESG credentials to be at the forefront of our businesses objectives.

Dean Cloke is Head of Property Real Estate within Zurich’s Commercial Insurance Division and has worked in a variety of property underwriting roles over the past 14 years. The majority of this time has been in the London Market across both Corporate Property and Real Estate management roles. Dean is responsible for the Real Estate Property underwriting strategy and related go-to-market approach. Dean is an Associate of the Chartered Insurance Institute and has an International Business Degree from Cardiff University.

The Aon Real Estate team specialises in advising on and placing property, legal indemnity, and rights of light insurance for real estate investors. Acting for 25% of the world’s largest investors, our team of sixty insurance and risk experts provide development to disposal insurance solutions for all asset classes from residential through to logistics. Using our understanding of real estate investors’ needs we work in partnership with our colleagues specialising in Directors and Officers, Construction, Mergers and Acquisitions, Surety and Health and Benefits to aim to minimise risk and deliver solutions that empower success. For advice on any aspect of your insurance programme, please contact Emma Vigus at [email protected] or [email protected]