Over the past three years, the UK Property Insurance market has faced significant challenges, driven by the cost of materials, labour shortage, inflation and a change in reinsurance (capacity and cost for insurance on large losses) which has resulted in double digit rate increases.
In 2023, the average rate ranged between 5-10%, marking a notable decrease compared to the 2020-2022 period.
The leisure and hospitality industries are showing signs of recovery, with many hotels, event companies and restaurants returning to pre-COVID revenue levels. The adoption of hybrid office environments is becoming a permanent fixture, particularly impacting urban business centres where offices, restaurants and retailers may experience reduced activity during weekdays. Mondays and Fridays can be particularly quiet, due to widespread company policies designating these days as WFH.
Inflation is exerting pressure on both clients and insurers. Insurers are compelled to limit their coverage sizes, and the elevated costs of reconstruction and rebuilding are eating into client profit margins. Unless inflation subsides significantly in the near future, it may soon outstrip rate increases, potentially impacting capacity (insurers appetite). Although current economic policies suggest a slowdown in inflation, the exact timing remains uncertain.
Accurate valuations, speed and appropriate coverage are critical in the current inflationary environment to ensure clients have adequate protection against catastrophic losses. Property values in the open market may have surged by 20-25% over the past year, rendering some policies up for renewal outdated. This exposes clients to risks without sufficient coverage and brokers to potential business losses, particularly for complex buildings due to rising re-building and material costs. Underwriters must provide expertise, education and responsiveness in this context.
It's important to note that clients are facing higher costs across the board due to the Cost-of-Living Crisis, which may tempt some to opt for lower-cost insurance. Brokers should remind clients that the premium reflects the quality and extent of coverage, and choosing policies solely based on price could result in dire financial consequences in the event of a significant claim.
Looking ahead, it's unlikely that insurance rates will decrease in the near term, but the previous pattern of consistent double-digit rate increases seen in 2020-2022 is expected to level off. Rate increases in the range of 5-10% are anticipated into 2024, with insurers remaining focused on achieving profitability, possibly in line with inflation.
Interest rates typically move in tandem with inflation, impacting each other, and the rising rates throughout the year raise short-term concerns about their impact on investment results and the broader economy. However, the direction of Property Insurance, as well as other policy sectors, will be influenced by economic policies.
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Key Issues for 2023
Global Natural Catastrophes and Treaty Reinsurance Renewals
The property insurance
market has been impacted by natural catastrophe losses and the subsequent increase in Treaty reinsurance costs on 1st January 2023. Natural catastrophes continue at record levels, with insured claims for 2022 exceeding $132bn ($100bn in 2021 and a 10 year average of $81bn), notably Hurricane Ian alone estimated at $50bn-$65bn (Swiss Re, 2022).
More than half of all reinsurance renewals take place in January and in 2023, the renewals have been described as “complex”, “arduous” and even “gruelling” by one brokerage and “tense”, “late” and “frustrating” by another, who have struggled to provide acceptable terms for their insurer clients (Guy Carpenter and Gallagher Re, January 2023). This is felt most in the Property market, especially for those insurers with a large proportion of North American exposure, with reinsurance increases typically over 50% and a cumulative increase of over 150% since 2018. Reinsurance capital has again reduced in 2023, this time by 15.7% to $355 billion (Insurance Journal, January 2023) and represents the “biggest reinsurance capital squeeze since 2008” (Howden, The Great Realignment, January 2023).
This extended period of large losses and its impact on the reinsurance market increases the overall cost base for insurers and keeps upward pressure on pricing levels. This will inevitably filter through to policyholders in 2023, which is likely to allow insurers to continue demanding rate increases on those clients in the heavier and most exposed sectors or with large claims, limited risk management engagement and therefore reduced insurer competition. These increased reinsurance costs may also prevent any notable rate decreases, even for the most attractive, profitable and well managed risks.
Inflation, Valuations, Supply chains, Brexit and Ukraine
A fragile global economy is forcing governments and central banks to balance the threat of recession with severe inflationary pressure as we tentatively emerge from Brexit, the Covid pandemic, currency fluctuations steady themselves and supply chains begin to recover. All insurance markets including Property, Casualty, Professional Liability, Financial Lines, Cyber, Accident and Health, Aviation and Trade Credit have felt the impact of Russia’s invasion of Ukraine to a differing extent, alongside the current volatility in international markets.
Inflation is a key theme for the UK insurance market in 2023, as it is across the wider economy, affecting Property and Business Interruption policies in terms of exposure values, reinstatement costs and Indemnity Periods. The Property market continues to see claims inflation in excess of 10% per annum, with a rapid rise in the cost of labour and materials for rebuild due to Brexit and the emergence from the Covid pandemic, with prolonged periods of Business Interruption and reduced business resilience, both financially and operationally.
The Casualty market and in particular UK motor fleet
is continuing to be impacted by double digit increases in the cost of claims which will be progressively passed onto customers, especially in sectors with reduced market competition.
Motor Fleet claims inflation continues to increase rapidly at 9.3% in 2022 (Claim Metrics) with a peak of 15.2% in June 2022. The supply of new vehicles and parts since the shutdown of factories during Covid and now the Russian invasion of Ukraine has been very difficult, resulting in record low availability and record high waiting times for new vehicles. The knock on effect to both the settlement and replacement value of vehicles has increased insurer costs substantially. Currency fluctuations due to Brexit have also inflated the price of vehicle parts arriving from Europe, along with rising repair costs due to increasing vehicle technology and labour costs and shortages resulting from the pandemic.
There is also a general lack of knowledge and expertise in insurers’ repair networks to deal with advanced driver assistance systems and the exponential growth of hybrid and electric vehicles due to their battery technology and unique software. Vehicle thefts also remain high, especially of keyless entry vehicles. Conversely, we are now starting to see lower costs of personal injury claims from whiplash since the Civil Liability Act (2018) was finally introduced in May 2021 and the restart of automotive production, both of which have alleviated some of the inflationary pressure.
Liability remains impacted by changes to the Ogden Discount Rate in 2017 and 2019, whilst social cost inflation continues with medical advancements and higher damages awarded for care provision, NHS compensation costs rising faster than inflation and wider exposure to emerging psychological risks such as mental health, abuse and discrimination.
Policy Coverage, Terms and Conditions
Policy coverage has reduced significantly since 2018 and especially since 2021, much to the detriment of clients, as insurers learnt lessons from the financial and reputational impact of non affirmative coverage arising from the Covid pandemic and also took advantage of a limited supply of market capacity to restrict their coverage. Any event that would cause a wide ranging impact which is not reasonably quantifiable is now often excluded, with non damage coverage under business interruption
policies being the obvious example.
Fortunately these restrictions have now steadied other than in specific circumstances. For instance, cyber
insurers are looking to exclude previously non affirmative cover for systemic events affecting the internet as a whole, e.g. a catastrophic infrastructure loss to cloud based services including Amazon Web Services or Microsoft Azure, or from a state sponsored action. From March 2023, all Cyber policies “must exclude liability for losses arising from any state backed cyber attack” (Lloyd’s of London, 2023).
Property and Casualty insurers also cannot accept exposure to Russia (or Belarus) in view of its invasion of Ukraine and subsequent increased sanctions, nor in Ukraine itself in view of the perils. These are targeted exclusions which is very different to the entire sections of Business Interruption coverage the market saw removed immediately following the pandemic, when we witnessed the emergence of blanket Communicable Disease (LMA5393) and Cyber (LMA5400) exclusions.
Captives, Parametrics and Market Innovations
Clients’ self insured risk retentions have increased significantly including large deductibles and the use of Protected Cell Companies and Captives to cover wider Cyber perils at both Primary and Excess level, reducing overall cost of external market insurance. This is very typical in a hardening insurance market, either by the voluntary decisions of clients to retain more risk and reduce their external market premiums or when encouraged by the insurance market due to a shortage of adequate capacity.
Differentiating in a Diverging Market
Once again in 2023, risks are broadly divided into two tiers, dramatically separated between those in profitable sectors and lines of business where there is a clear appetite for insurers to grow again and others where there is limited to no competition on pricing and restricted capacity.
For the very best risks, competing insurers are beginning to expand their appetites cautiously and explore opportunities to accelerate growth once again, whilst existing insurers are constraining their rate demands and improving their underwriting flexibility. Brokers are achieving rewards for clients’ loyalty, including multi year Rate Stability Agreements, Low Claims Rebates and Risk Management Bursaries, as insurers look to protect their market share from competition.
As the market continues to diverge, it is crucial that brokers are able to create quality market presentations and differentiate their clients to underwriters by communicating a depth of knowledge of the risk exposures and providing detailed information on how these are mitigated by positive risk management features and planned improvements.
It is also important to present detailed, accurate and user friendly claims data, which represents a challenged and cleansed claims experience and includes supporting analysis of claims defensibility rates, cause trends and reserve settlement factors that can be used to negotiate improved terms and programme structures for risks with a frequency of claims.
Insurers are continuing to compete for risks which the broker has articulated clearly to be of high quality, proactively risk managed and which are historically profitable based on their claims experience. This competition is also containing incumbent insurers’ ability to force through severe premium rate increases where it is not warranted by claims performance or trade.
Although we are still at the very peak of insurer pricing, in which many clients are seeing substantial premium increases due to sector, claims, product line or risk management standards, the tide has now finally turned towards stability.
The increased pricing and retentions experienced by insurers from their Treaty (portfolio) reinsurance renewals and the reduced availability and higher price of Facultative (risk specific) reinsurance will add rating pressure to Property risks in 2023, though for many clients this will likely be mitigated as increased reinstatement valuations, exposure values and Indemnity Periods inflate premiums.
Non combustible and well protected Property risks, with sprinkler (or equivalent) suppression, low inception hazard, separation between buildings, high quality risk management and established Continuity/Resilience planning, are being rewarded with decelerating rate increases. Capacity and competition are not expected to reduce further without specific claims or risk management justification.
Key exceptions include buildings of combustible construction including those that contain unapproved composite panels, which has led to multiple high profile fire losses. This construction method is especially prevalent in the warehousing
, food and pharmaceutical/medical sectors for temperature control, often combined with negative trade features, e.g. heat processes.
Residential Real Estate portfolios including social housing, assisted living, care homes
are broadly seen as unattractive to insurers, with residential occupancy increasing the fire hazard and insurers suffering consistent escape of water
losses. This is particularly challenging where these risks are of combustible construction with polystyrene composite panels or ACM cladding.
As underwriters continue to be highly selective, trades with a higher inception hazard are also seen as unattractive, including food, waste, timber, tyres, paper, plastics and chemicals, along with risks that are not protected by adequate fire separation and suppression, e.g. large, unsprinklered warehouses or those which may be difficult and expensive to rebuild, including listed buildings.
Other blogs that may be of interest:
The widening gap of property underinsurance
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