Seasons in the sun

More than half a million UK homeowners also own property abroad.

With continuing high property prices in the UK, and the wealthy 'baby-boomer' generation entering retirement age, the number of people purchasing second or third homes in sunnier climates is growing rapidly. This is particularly true for the high net worth market.

However, while the number of overseas homeowners grows, finding the right insurance is not becoming easier. Many local markets offer limited cover, and local property laws and regulations can be complex, meaning insuring dream homes in the sun can become a nightmare. While the UK insurance industry readily accepts that the overseas HNW market holds significant growth opportunity, the number of UK insurers offering cover remains small.

Overseas visit

The majority of local markets do not have established HNW underwriters locally, which gives UK brokers an advantage. However, two factors mean there are very few underwriting options. Traditionally, such risks were written in Lloyd's, but consolidation over the past 10 years has made it unattractive for brokers and underwriters to place small to medium premium policies in Lloyd's. Additionally, and more importantly, many underwriters have shied away from the overseas household market in light of the complex and varying local licensing, taxation and market regulations.

In practice, underwriters have not been prepared to make the effort to understand the implications of writing overseas.

The complexity of this market is illustrated by the fact that compulsory coverages vary dramatically from country to country. In France and Spain, state intervention in the coverage provided by underwriters is the greatest.

Given these countries have the majority of overseas homeownership, understanding what these compulsory coverages mean is crucial.

In France, the Regime des Catastrophes Naturelles is a law that gives all insureds the benefit of cover against losses caused by 'a natural agent', irrespective of what the insurer's wording says. For example, while an underwriter may expect to pay losses due to a flood, they may have a nasty surprise when faced with a large bill for subsidence or earthquake, even though both those perils are excluded in their wording.

Another French twist that will catch out naive UK insurance professionals is that it is illegal to exclude storm or terrorism when providing fire cover. Added to that the fact that French courts almost always judge in favour of the insured, instead of the insurer, and what may initially seem an ordinary underwriting decision can have dire consequences.

In Spain, the situation can appear similar to that in France but is altogether more favourable to UK insurers, provided the law is well understood and interpreted. 'Consorcio' is a mechanism whereby insurance companies automatically offload any natural peril or terrorism exposure to a state-owned reinsurance company - provided the levy of 0.009% of the sum insured is paid to the Spanish tax authorities and the policy includes the legal wording known as the 'Consorcio Clause'. In view of the huge increase in the price of catastrophe reinsurance and terrorism insurance, the Consorcio is a good deal for insurers - but failure to comply will make it impossible for the insurer to benefit.

Taxation is another area where insurance professionals need to take care.

In the UK, an insurance policy is a private contract between an insurer and a client; not so in many European countries. In France, up until a few months ago every insurer had the obligation to declare to the fiscal authorities any policy that insured more than £10,000 of fine art or jewellery.

In Spain, the authorities will ask for details of any risk in excess of EUR18m (£11.8m) of exposure - again there is no tax liability but this could make clients uncomfortable.

Insurance premium tax is also an issue. The UK's IPT of 5% seems positively reasonable when compared to Greece's 15.4%, or Italy's 22.25%. And there is a EUR4 flat fee applicable to each policy in France, which must be paid by underwriters along with all other local charges. As the European Union legislation tightens, and controls become more effective, failure to calculate and collect the appropriate taxes can lead to substantial fines. Providing adequate resource to stay aware of the changes in the local tax charges is now a business imperative.

Local knowledge

Finally, claims handling. Being able to provide a policy according to the local rules and regulations is one hurdle; being able to provide the customer with the promise of insurance - to pay a claim and assist a customer in the case of an emergency - is the real test.

The language barrier needs to be overcome, local adjusters need to be found, and it is often the case that market practices are different to those in the UK. Take a burst pipe that has flooded the apartment below, for example. In the UK, this is considered bad luck and the neighbour's policy picks up the loss. In France or Spain, however, strict liability applies and it is the client's policy that has to pay. Failure to understand such differences will cause client suffering and also damage the underwriter's image.

Despite the complex set of rules, the ever-growing number of people owning a home abroad means there is great growth potential in this market. Brokers in the UK are in a strong position to benefit from this new market, provided that they can be supported by underwriters that fully understand the implications of underwriting overseas.