The diverse scope of overseas clients requires greater communication than ever between insurer, broker and investor.
The last 12 to 18 months in the London property owners market have seen an emerging trend in investment overseas. There has been increasing and significant demand for cover to be written on a broader pan-European portfolio basis, rather than individual territories.
This development has led to a greater variety of assets being covered over a larger geographical spread. This not only presents insurers with challenges on how to respond to these new demands but also in how to best support brokers that service this sector and grow their books.
Closely linked to the health of the construction sector with property demand pressurising supply and prices, the property owner’s market is inherently linked to economic performance. With 0.5% growth in quarter three of 2015 representing the ninth quarterly gross domestic product growth at or greater than 0.5% since 2012, the UK economy continues to provide a strong and solid platform for property activity. The UK remains a prime investment destination in a world of low interest rates, in part thanks to the stable political environment. As well as due to the more recent rise in real wages, which is helping to support occupiers and renters, despite increasing property prices. But it’s not just domestic demand. In fact in Q1 2015, 47% of inwards property investor activity came from abroad, with 48% of that coming from the US and 24% from Europe.
For investors, developers and owners, portfolio deals remain popular. But despite the strength of the UK property market, portfolios are more frequently diversifying with a mix of commercial and residential properties overseas. From a UK perspective, traditional UK real estate funds are spreading pan-Europe in order to distribute assets and liabilities in significant growth areas, so as to balance their real estate portfolios.
Challenges for industry
The need for a comprehensive property owner’s insurance policy that caters for these varied portfolios is consequently on the up. Mixed commercial and residential portfolios can include anything from houses and flats to industrial warehouses, shopping centres and trophy assets. And they may include hundreds, if not thousands, of properties.
On a domestic basis, the challenges for the insurance industry are around service, claims and certificate issuance as an example, and underwriter risk assessment. These issues considerably increase when accommodating and serving this demand on an international basis.
The diverse scope of clients – be they investors, developers or occupiers – with an even more diverse set of property, clearly means the insurance needs of each will differ. Getting the right and appropriate cover in place, therefore, boils down to the understanding and communication between client, insurer and broker.
Understanding the quality of risk can pose challenges, including the quality of the client. For an insurer, the importance of validating the quality of the management exercised over the portfolio by the property owner or managing agent cannot be understated. For example, an indicator of good quality is an insured who has a regular procedure in place for the professional valuation. This is important for ensuring adequacy of sums insured.
From a physical risk quality perspective, global real estate undoubtedly varies from accepted UK standards. Overseas markets and localities have their unique differences, including construction techniques, building standards, regulation and specific location exposures. Without a local presence or survey capabilities in the country where property is situated, this can create challenges for underwriting assessment.
Furthermore, with multiple legal and tax regimes worldwide, international and pan-European solutions require careful evaluation. Not only must payment of insurance premium tax, levies and fees be considered, but also insurance-related expenses and claims settlements must be accounted for. There are significant penalties and interest for failing to comply with the rules applicable in each country, on top of reputational damage and potential retrospective tax liabilities if the policy is declared void.
A diverse portfolio of properties over a large geographical spread will further lead to a need for bespoke coverage requirements. For example, full perils cover, or theft and subsidence are not always available or needed in the local market being covered.
Another challenge for the industry relates to changing weather patterns and exposure to natural catastrophes. Although a greater geographical spread is beneficial in terms of portfolio resilience to both legal and economic trends and isolated weather events, the exposure to natural catastrophes such as earthquake and flood is greater elsewhere than in the UK, especially if the portfolio has accumulation in Europe. Pan-European and even global catastrophic events have the potential to turn the market, illustrating the need for a financially robust and stable provider.
Market state and response
Some insurers’ real estate teams in the UK are shifting their focus to build capabilities to service the changing shape of the market, with international portfolios only entrenching further in the long term. At current the market is soft with a large amount of capacity, and it looks set to remain this competitive in the short term.
In this saturated market, brokers can add significant value to clients with complex needs. Specialist broking expertise in this area, including multinational risk knowledge and advice on planning and managing diverse portfolios, complements a bespoke insurance solution provided by a capable insurer. Furthermore, the broker service element is crucial. Insuring property on a large scale across borders can be complex and onerous, so brokers need comprehensive administration and claims management solutions. These solutions are built on strong communications and understanding between insurer and broker before the point of sale when underwriting the risk, through to servicing claims and administration.
In response, insurers can help and support brokers by providing a customer-centric proposition that caters for a wide range of needs, giving brokers more choice to find the most suitable cover for their customers. But broker and insurance service no longer falls just within the pure insurance coverage remit. Brokers need to help clients understand how to best manage the current and emerging exposures facing their property portfolio. This is an opportunity for insurers to offer a wider risk-related offering, inclusive of risk management advice and strategies.
Insurers must understand the unique challenges faced by property owners whose substantial levels of investment into these assets require safeguarding. Fully compliant solutions with a global and local footprint are required. Technically, insurers need specialist underwriters to support broker expertise and technologically, insurers’ and brokers’ systems and digital platforms must facilitate working closely together with ease of access and administration.
Ultimately, as the trends of the last 12 to 18 months embed further, so insurer capabilities, expertise and offerings must continue to develop in order to support brokers and clients.
By John Dunn, Head of London market property owners, Allianz
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