The Insurance Market started to increase rates for the residential and commercial property sector at the back end of 2018 and while some argue the worst is over with, the trend looks set to continue. The Acturis Commercial Broking Index has reported an 8.3% increase in Property Owners insurance rates in the third quarter of 2021, (almost as high as for any quarter result in the previous two years), but in practice some rates have increased by 50% and more. Construction Insurance has similarly increased, although Construction Professional Indemnity (PI) in particular has been hit with very hard increases, sometimes double the previous year and more.

Reasons for this are well documented. The Property Insurance Market had been under priced for years and whereas insurers were competitively writing business whilst the equity returns globally were good, Combined Operating Ratios (basically premium vs claims, expenses and commissions), impacted also by natural disasters and large loss events, moved above 100% for most insurers in 2019 and they are now focussed firmly on the underwriting result to ensure profitability. For PI and other Financial Lines insurance, significant claims in the US and latterly the UK and other global territories have caused insurers to take drastic action to correct their underwriting results in these lines of business also.

The pandemic has had a major impact on the Property sector. The government imposed lockdown resulted in commercial properties being left vacant for extended periods and many businesses having to close their doors permanently. Inevitably, the various periods of lockdown and closed premises led to an increase in water damage, vandalism and theft claims, many of which went unreported for long periods as occupiers and/or landlords were unaware what had happened. All this has led to increased claims activity and more restrictive terms or requirements from insurers.

Construction activity was less impacted by COVID-19, with workers in the sector deemed essential and a more limited impact of lockdown measures. Sites were still affected, not least of all by individual workers testing positive, disruption to worker ‘bubbles’ and disruption to supply chain. Insurers saw increased claims activity for much the same reasons as above for Property Owners, but to a lesser degree as the less restrictive lockdown meant activity at most sites was able to continue quickly.

Planning requirements and improved fire detection and prevention systems have had a positive impact on fire losses, reducing frequency and severity. However, modern methods of construction such as timber frame and the use of combustible cladding have led to unexpected loss activity. The aftermath of the Grenfell Tower disaster has been well documented, with the abundant use of such materials on modern buildings throughout the country impacting significantly on insurance pricing and terms, although availability has sometimes been more the issue than just price.

There is also the affect of inflation in the cost of building materials, whereby a number of factors including the weak £pound, a lack of skilled tradesman linked to Brexit and the resultant delays around the pandemic has driven cost up significantly. Naturally, these costs flow through to insurers with claims costs for damage repair/replacement. The increased costs of reinstatement also affect values insured, the concern more recently that declared values are significantly lower than the actual rebuilding cost, leading to underinsurance and impacting claims settlement. This is now a major worry for insurers and a big problem for insureds.

Linked to the delays resulting from the pandemic and supply shortages generally is the inevitable completion delay for projects, with overrun meaning that insurance cover originally intended for a specific contract period then needs to be extended. The issue is that insurers then become concerned that they have a protracted period until practical completion and handover before they are off risk, challenging both the premium and policy terms for the cover extension and sometimes reducing capacity or wanting to come off risk altogether.

Finally, another trend we are seeing is an increasing concern for the risk of water damage, resulting in insurers refusing cover, limiting capacity or generally increasing premium and imposing more restrictive policy terms. As a result, the presence of water leak detection systems has become paramount and is sometimes an absolute requirement for insurance, particularly in new build residential schemes.

A ‘hard market’ in insurance terms means premiums increase, more restrictive cover and onerous terms are imposed. Insurers also become more selective so as a result, a substantial amount of additional information and a more sophisticated approach is required to obtain the best terms.

Underwriting capacity is also more limited. As such, insurers need to be persuaded to use it to provide you cover - rather than someone else. To do this and to get your risk front of the queue, we recommend:

• Start early!
• Ensure you have full and detailed property information. Consider ‘risk surveys’ at key locations (working closely with Underwriters, we can often achieve this without cost to you).
• Identify properties that are likely to be a challenge, such as those with cladding, non-standard construction or flood issues. A specific plan will be required to ensure cover is obtainable.
• Have up to date and accurate sums insured, taking account of latest building indices and trends on overall costs as outlined above.
• Undertaking a review of your current insurance needs. Have they changed since your last renewal? Your existing program may be providing cover you don’t need, or you may have ‘gaps’ as a result of changing risk conditions (if you are not already a client of Berkeley Insurance Group, we can provide a free and confidential ‘Silent Review’ to achieve this for you).
• Carefully consider the insurers you wish to engage with and start working with them well in advance of renewal. It is now crucial that you have an insurer with a risk appetite that matches your profile. Insurers may have changed their focus since your last renewal.

In summary - the hard market means that it will be more difficult to obtain cover and to control premiums. Therefore, you need to prioritise your insurance management and ensure you are receiving the right advice from a specialist broker.

Berkeley Insurance Group have been a ProCon Patron for many years and we are committed to supporting the membership. In these challenging times, it’s important that Leicestershire businesses work together and support each other.

Alan Percival, Director

• 0116 261 4728
• apercival@berkeleyinsurancegroup.co.uk