With real estate investment going global, Graham Smart examines the insurance industry's approach to protecting the assets involved.
The globalisation of real estate investment has led the insurance industry to develop a specialist approach to insuring these types of risks — offering master policy coverage to clients on a global basis, as opposed to insuring such assets on an individual or national portfolio level.
However, a range of issues can arise when dealing with claims for these complex clients. A combination of huge asset portfolios, a complex chain of stakeholders and exposure across different geographical locations means that insurers and brokers are now focusing more on how they can provide their valued clients with a uniform and consistent approach to dealing with claims. The need to work across different jurisdictions, cultures and regulatory regimes is prompting many to look at nominated service providers.
Property has always been perceived as a strong investment asset and has been a key component of any mixed portfolio, providing stability against the potential volatility of equities. Many investment businesses now have standalone real estate arms, varying funds with differing focuses and risk levels.
The globalisation of business and, in particular, the emergence of economies in eastern Europe, has seen the spread of investment assets across the world with pan-European and global funds being created. A good example is post-unification Germany, where two factors have driven interest. Firstly, existing property assets were considered to be undervalued in the context of 'western' values and, secondly, the economic spark from unification prompted significant development making the country a target for investment both internally and externally.
It is now common for investment businesses to have major exposure in Germany — indeed, many of the German real estate companies have been acquired by larger overseas investors or sit as joint venture enterprises with shared equity. Poland, the Czech Republic, Hungary and Bulgaria are also popular with international investors and the range of assets is broad, from multi-occupancy residential to offices, hotels, warehousing and heavy industrial.
Historically, assets may have been insured in the local markets, perhaps on an individual or national portfolio level, but it is now recognised that the consolidation of local covers into pan-European or global programmes creates not just potential premium savings, but the delivery of consistent cover, tailored specifically to the investors needs. As ever, the London insurance market leads the way in this regard with real estate being recognised as a distinct business sector.
But while pan-European and global programmes amalgamate significant asset values — often running into billions of pounds and thus providing effective ways of securing bulk premium — the asset spread creates many issues at jurisdictional, regulatory and cultural levels. All of these have to be balanced against the client's desire to have things handled in a consistent way across differing territories.
Nowhere is this more true than in the claims arena where a consistent, uniform approach to an incident is required — whether it occurs in Gillingham or Gdansk.
The desire for uniformity is driven by an ever increasing expectation of service and, in the complex field of real estate, this expectation is held by a mix of involved parties. At the highest level will be the risk management function of the investor who will be charged with the coordination of insurances across the portfolio. Beneath this will be the 'owning entity', often a special purpose vehicle created for just this purpose. The investor may or may not retain full equity in this enterprise, perhaps sharing it as part of a joint venture with others.
There are then the tenants to consider. The location may have multiple occupancy and, in the context of a retail environment, may be home to many commercial entities, all with differing yet equally pressing commercial needs. In such testing economic times, rental yield is a major concern to investors, especially where there is an element of 'performance rent' — where rent is directly linked to revenue generated by the tenant at the particular location.
A major incident may well affect tenants' abilities to trade and thus have a knock on effect to rent or, in the worst of scenarios, either give rise to the triggering of a cessor of rent clause or cause the tenant to withhold payment.
Other than the obvious commercial impact on the investor of a reduction in, or non payment of, rent, external finance deals may be linked to rent yield, setting minimum thresholds as covenants. Reduction in yield may breach these covenants, creating major pressure on the investor and potentially forcing refinancing. Effective resolution of claims is, therefore, vital.
Spread of assets
The geographic spread of assets brings challenges in itself as exposure is so broad. While the last winter was harsh in the UK, it has proved one of the worst on record in continental Europe with France, Germany and Italy being hit by unusually prolonged periods of sub-zero temperatures accompanied by very heavy snowfalls. This has caused the inevitable burst pipes and losses through snow-loading.
Just as the weather started to improve, Atlantic storm Xynthia smashed into the western coasts of France, Portugal and Spain on Sunday 28 February 2010, bringing torrential rain driven by winds of up to 140km/h. Significant damage was sustained across a wide area.
The claims issues arising from these two events are varied and range from the extent of cover provided at local level — the master policy ultimately dictating the indemnity provided — to the involvement of local national catastrophe pools such as Cat Nat in France and Conscorcio in Spain.
What is interesting to note about this area of the market is that brokers and underwriters specialising in this complex area are increasingly seeing the value of using nominated — as opposed to panel — service providers in the claims process, whether that be lawyers or loss adjusters.
The benefits of dealing with one global entity, as opposed to a number of different organisations, are clear. Each party has the opportunity to gain in-depth knowledge of these complex clients in advance of a loss actually occurring, ensuring that claims are dealt with consistently, despite all of the different challenges that can occur across the globe.
Handling claims on an international scale - click here for all the developments inthis area.
Graham Smart is executive director at MYI Chartered Loss Adjusters
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