Product overview: Commercial property

Protecting businesses from risks such as fire, flood and theft is a well-established role for insurance. But while the commercial property market has a long history, it’s facing a number of challenges that could bring about change.

After a 20 year plus soft market, rates have hardened on the back of a series of large losses over the last few years including the floods in the EU and hurricanes in North America. “The market started to harden at the back end of 2019,” says James King, senior executive at the Clear Group. “Thanks to attritional losses, from flood, escape of water and a number of large fires, the soft market was unsustainable for insurers.”

Under pressure
Capacity has come under pressure with several insurers pulling out of the market and others becoming more selective. Deductibles have crept up, exclusions for Covid-19 and communicable diseases added, and wordings have also been assessed, with broker wordings rewritten to bring cover back to its original format. “Four years ago, I would have been able to get one insurer to cover a commercial property for a £20,000 premium. Today, the premium is closer to £150,000 and I have to spread the risk across four insurers,” says King.

As well as more losses, claims inflation has also fed into the insurers’ pain. Over the last few years, the cost of repairs and replacement plant escalated as a result of supply chain issues. “We’ve definitely seen insurers tighten their belts in the past couple of years in terms of rates and appetite for commercial property,” says Ryan Legge, head of commercial at Hayes Parsons. “The emergence of the hard market was perhaps already driving this, which the pandemic then compounded.”

Pain points
The hard market means more work is required to place commercial property business. Insurers are demanding much more in-depth information about risks, requiring brokers to extend lead times to ensure appropriate cover can be arranged. “It’s difficult,” adds King. “Many clients weren’t around when the market was last hard so it’s a big education process.”

Some areas of the market are proving particularly difficult. Jeremy Pace, managing director at Pace Ward Insurance, says that anything with composite panels can set insurer alarm bells ringing. “Insurers want chapter and verse when it comes to anything with composite panels,” he explains. “Appetite is very varied too. Some will try to accommodate these risks while others throw out a large portfolio because one property has cladding. It can be really difficult.”

This varied risk appetite can be seen outside of the more troublesome risks too. Pace says that while some insurers lapsed all renewals across some business classes, others remain very much open for business, as long as they can get all the risk information they need. 

Cover limits
As well as facing higher premiums, claims inflation also puts pressure on cover limits. Thanks to the combination of the pandemic, Brexit and even the Suez Canal blockage in March 2021, it now takes longer for replacement items and materials for repairs to be delivered, with implications for cover. 

To take this claims inflation into account, brokers and insurers are recommending higher sums insured and longer indemnity periods to ensure there are no shortfalls. As an example, Pace says he’s been moving clients from 24 to 36-month indemnity periods. “Some of the larger properties, especially in Central London, are moving to 60 months,” he says. “It can take so long to get permissions as well as all the extra time waiting for materials.”

Climate concerns
Given the bricks and mortar nature of this risk, climate change is a key concern for the commercial property market. According to Swiss Re Institute’s sigma study, More risk: the changing nature of P&C insurance opportunities to 2040, climate-related risks are expected to result in a 22% increase in global property premiums over the next 20 years as weather-related catastrophes become both more intense and more frequent.

Although there’s an increased risk of more subsidence claims due to the weather extremes, flood is the biggest concern for insurers. “From a UK point of view, it’s all about how we manage surface water events,” says Andy Pilling, UK and international leader for property and construction and engineering at RSA. “Do we have the right geographical tools to understand the risk? We need to know whether the infrastructure can cope with the level of rainfall we’re seeing.”

The flash floods that hit London in July 2021 are a prime example of this. With the Victorian drainage system unable to cope with the volume of water, the capital was left underwater with train stations flooded and hospitals forced to turn emergency patients away.

Insurer concerns about flood risk are already feeding through to commercial property wordings, as Legge explains: “Flood terms have become far more stringent due to the mapping systems that insurers are using. It’s adding to the challenging market.”

Emerging risks
As well as focusing on the age-old risks associated with too much and too little water, the commercial property market is also exploring how cyber risk affects it. Pilling is keen to ensure property insurers don’t take on more cyber exposure than they expect. “Property underwriters only cover physical damage,” he explains. “If someone hacks into a production line, causing an over-run that results in a fire, the property insurance would pick up the damage caused by the fire. If there was no physical damage, it wouldn’t respond.”  

This provides some clarity around cover but accumulation remains a concern. For instance, if a cyber attack were to affect all the turbines made by one or two manufacturers, causing physical damage by altering the controls, an insurer could find itself with an accumulation well beyond its normal exposure. “We need to understand the impact of cyber,” Pilling adds.

Future outlook
Already there are signs that the market is stabilising, with the rate of premium increase starting to reduce. However, expectations are that it will take two or three years to return to normal.

And while no one expects rates to return to pre-pandemic levels, many would like to retain some of the lessons learned during the hard market. “Being able to bring together all the expertise on a video call is really beneficial, helping to get issues resolved quickly,” says Pace. “This should definitely carry on as it benefits everyone.” 
 

*Correct as of November 2021*