The real estate insurance market has been in an extended soft-cycle for several years. In this bulletin we explain what drives the market cycle, the various factors effecting capacity and pricing, as well as giving some insight into what property owners can do to maximise efficiencies in their insurance procurement.
Property owners with quality, well managed assets and good claims performance have recently benefited from low rates and increased levels of cover, while insurers have seen their underwriting profits squeezed. It can be easy for owners to become complacent around renewal as rates remain suppressed, but with some knowledge of how the market prices risk and obtains and allocates its capacity, clients can maintain premium levels or even achieve a saving.
Working closely with underwriters at some of our key markets, we have established some key factors on which to best advise our clients.
Like other market cycles, the real estate insurance market experiences softening and hardening in response to external pressures. The main contributors to the current soft conditions are:
- Over supply of capacity/availability of capital to insurers
- Performance of the wider financial markets
- Absence of large or catastrophic losses
- Cheap reinsurance
Capacity can refer to that of an individual insurer and of the market as a whole. The former relates to the largest single risk a carrier is able to accept (be that on an individual asset e.g. a trophy high rise building, or an accumulation of risks in close proximity e.g. a city centre). The latter is the combination of the capacity of all the carriers in the market. Currently, there is a surplus of market capacity, as new entrants are drawn to the perceived low-risk returns of investing in the commercial real estate insurance market. Insurers are pricing aggressively to win new business and incumbent carriers have to act defensively to retain their book.
An insurance company’s capacity is dependent on two things: the investment capital behind the company and their reinsurance arrangements. Legislation dictates the minimum level of capital that is to be retained to underwrite a company’s current and future obligations (Solvency II). The amount of capital committed by investors dictates the level of risk a company is able to accept. Reinsurance is then bought to spread the risk further; the type and amount of reinsurance purchased is based on the individual risks taken on, the accumulation of all the risks on the company’s books and amount of risk the insurance company is willing to retain. The cost of this makes up a large proportion of the premium charged to clients. The current reinsurance market is also very soft and shows no signs of changing, aided by a lack of major global catastrophic events.
The way in which an insurance company categorises and determines its likely exposure, and therefore the risk it is willing to commit to, will also affect its capacity. The maximum amount subject to loss may or may not include all covers (material damage, business interruption/ loss of rent or public liability) or may be calculated by other methods, resulting in differing levels of retained risk.
Understanding which markets will be best positioned for a particular risk is the responsibility of a broker: ensuring yours fully understands your portfolio’s needs and has the required market insight is key to obtaining the best cover at the right price.
You can download the full market update by visiting the JLT Specialty Limited website.