As we start 2018, we look at some of the keys events that have impacted the real estate sector in the last 12 months and how they are likely to affect our sector going forward. 2017 was an eventful year, as we saw the tragic events of Grenfell Tower, the US hurricanes, sterling depreciation, changes under Brexit and an increasing number of cyber attacks. In our latest bulletin, we discuss the impact these events have had on the real estate industry and the insurance market.
After a number of mergers and new entrants into the real estate insurance market in previous years, 2017 has been relatively quiet on this front with capacity remaining stable. However, with shareholder desire for return on investments, insurers like any other industry do not want to stand still and continue to look for growth and increased market share in order to satisfy shareholder expectation.
Insurers are becoming more selective in the risks they write, with poorly performing or undesirable features, such as composite panels, being targeted for premium increases or punitive terms. Risks with modern construction methods and good claims experience continue to be sought after and aggressively priced.
Our view is echoed by Andrew Whittaker, Managing Director of European Property Underwriting Limited who said:
“The tragic events of Grenfell Tower are being felt in the insurance market and real estate market with composite panels now being scrutinised very carefully and the retrospective installation of sprinklers causing a major investment concern for the owners.
“The effects of ‘HIM’, otherwise known as hurricanes Harvey, Irma and Maria that hit the USA and Caribbean are having an impact on worldwide reinsurance losses that may well impact on direct insurance placements in the UK and EU, therefore the market is likely to be extremely diligent in risk selection and pricing accordingly.”
It’s during market conditions such as these that our experience and expertise allows us to ensure we get the best possible deals for our clients.
What to expect in 2018?
The uncertainty surrounding Brexit is still having a major impact on insurers, brokers and investors alike. As we go to print, the real estate community needs to be mindful of any post 29th March 2018 renewals. Should passporting rights be withdrawn after 2019, there is a possibility of short term policies being required and/or cancellation clauses inserted into policies to cater for the scenario of the UK being unable to trade freely within the EU.
In light of the above, many in the insurance market are putting plans in place to ensure the impact on pan-European programmes is minimal. New or enlarged offices in the EU are being established by both insurers and brokers. We have also recently increased our over overseas European network following the acquisition of JLT Belgibo in Belgium so that we can continue to advise you of any issues should Brexit negotiations restrict our ability to manage European assets.
Brokers and insurers alike continue to lobby the government for a resolution but investors with pan- European programmes will need to ensure that their broker and insurer are prepared in order to avoid any gaps in cover and service.
Real estate transactions
Depreciation in the value of sterling has resulted in an increase in overseas investment especially from the Far East, driven by the need to diversify away from local currency whilst at the same time taking advantage of the weakened pound.
As a result, our mergers and acquisition (M&A) team have seen a number of overseas investors undertaking transactions, primarily in the office, student accommodation and logistic sectors. Whilst many of these will be long term investments, there is some concern that the recent budgetary changes to capital gains tax could stifle this activity or cause some to divest from the UK.
In our view the market for real estate M&A insurances remains extremely competitive. We have achieved premium reductions on a number of like-for-like cases and placements of risk that were not previously deemed as standard or acceptable throughout 2017.
After the tragic events of Grenfell Tower, insurers are becoming more selective especially in the residential and student accommodation sectors where there are high concentrations of aluminium composite material (ACM). They now require additional information around construction and management processes, but where good risk management and understanding of the residential risk can be demonstrated, competitive terms can be achieved.
Our specialist residential team continually look to challenge this market and have managed to negotiate enhanced coverages such as loss of rental deposits and legal costs for residential property owners during the latter months of 2017.
We believe that those portfolios that benefit from good risk management and loss mitigation measures, especially where escape of water issues are polluting an otherwise attractive risk, have seen the biggest change in attitude from insurers.
Vacant buildings will continue to be seen as high risk by the market, with the expectation of additional risk, management measures to be put in place to reduce the potential of squatters, fly tipping and other losses related to a vacant property. Failure to do so will see insurers impose restriction to cover and/or higher excesses.
In excess of 20% of the largest claims from our clients are attributed to the above types of losses, with the average loss significantly higher than that of other perils. This highlights the impact managing these risks can have on your claims experience.
We continue to explore ways to help our clients with these issues, and as such have a very close working relationship with both VPS (vacant property specialists) and LeakSafe. Many insurers are willing to work with us in order to actively manage and in some case contribute towards the installation of loss mitigation mechanisms through risk management funds. Should you not be aware of these measures, please feel free to contact us.
Property owners’ liability
Property owners’ liability limits were under the spotlight last year. Traditionally this exposure has generally been seen as a lower risk by the insurance market, as the main concerns perceived by insurers and landlords are:
- The spread of fire – what is the likelihood of a fire occurring at one of your assets, negligently spreading to adjoining properties resulting in a liability claim for the damages caused?
- Injury / death to a third party – what is the likelihood of a single or spread of assets that could cause significant loss of life?
Examples would be:
- A retail/shopping centre with a high footfall and, therefore, death or disablement following an accident
- Premises that are occupied by tenants with significant income potential (an investment bank, for example).
With this in mind, it has been common practice for owners to arrange cover with a limit believed to be sufficient to cover catastrophe losses emanating from these two areas.
However, following the events of Grenfell and the claims that been made by the victims’ family members, police and attending emergency services, it has come to light that a limit traditionally seen as sufficient may in fact be breached, leaving large uninsured losses for the property owner. These losses have also coincided with changes to the Ogden discount rate resulting in preliminary liability reserves exceeding anything previously seen in the real estate market, meaning that this catastrophe limit may now be in need for serious review.
With a number of cyber attacks occurring throughout 2017, this remains on the agenda for most policyholders as a result of increased tenant demands for smarter and more sophisticated space. We have been working in conjunction with Hogan Lovell International on this matter and their view is that:
“Landlords should consider whether an interruption to business activities as a result of a cyber-attack constitutes a breach of the tenant’s quiet enjoyment of its premises. This is particularly the case where a building management system is attacked. A landlord in these circumstances would be well advised to also consider potential liabilities under covenants to adequately insure the premises and keep every part of it in repair.”
Pool Re have recently announced the inclusion of cyber cover (as of April 2018) for material damage and business interruption losses caused by terrorism using a cyber trigger, as standard under the government backed cover, demonstrating that the market is trying to adapt to not only modern risks, but the needs of the client. We are not anticipating the non-Pool Re insurers or their property policies to adopt this approach any time soon and therefore there is potential for uninsured risks unless the cover is arranged on a standalone basis.
Legal indemnity insurance
The legal indemnity market continues to mature with strong competition between insurers keeping pricing reasonable. This is helped by the low loss ratios we have seen for a number of years. Whilst we have assisted with a number of claims in 2017, there were no major seven figure losses in the market that we are aware of. Capacity continues to grow despite some issues in the last quarter of 2017, but it is becoming more common to see larger layered placements. This helps with both the premium costs and spreading the risk between insurers.
Europe continues to be the key area of growth with a number of insurers offering cover and some innovative products for countries that are turning to title insurance more regularly. Germany, France and Spain are the main focus but many countries in Europe, and beyond, are expected to see development in their use of insurance in the transaction process. These policies are still generally placed in London but insurers are opening local offices and the JLT International Network is increasingly engaging with their clients.
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For further information please contact Gary Reed, Head of Sales on +44 20 7528 4399 or email firstname.lastname@example.org