If you’ve been paying attention to headlines in recent months, you’ve probably seen that the property insurance market is undergoing a process of “hardening”. What this means in layman’s terms is that insurance providers are raising their premiums and tightening their terms and conditions.
This might concern you, since nobody likes to pay more than they have to for protection. If it does, read on to find out why it’s happening and how working with a broker can help you.
A “hard” market is characterised by high premiums and strict terms and conditions
For the better part of two decades, property developers and owners have benefited from “soft” market conditions. Essentially, a period like this is characterised by low premiums, high availability of cover, and flexible terms and conditions.
Conversely, in a “hard” market, premiums are typically higher, and terms and conditions are stricter.
Most industries go through periods of expansion and contraction, and this includes the insurance industry. Typically, the cycle goes like this:
- When the business is good, capital flows into the market. As a result, insurance providers offer more favourable rates and wider cover to attract more customers.
- Due to this competition, profits fall as providers attempt to undercut each other.
- Seeing this reduced profit, they then raise rates and tighten their cover again.
- This boosts their profits and gives them more leeway to offer lower rates and more flexible terms and conditions, beginning the cycle again.
Due to the strong competition between insurers in recent years, consumers have benefited from this “bidding war” and have been able to take advantage of more favourable cover. However, a variety of factors is causing that to change.
Factors such as climate change and the pandemic have impacted the insurance market
In the last few years, several factors have combined to drive down the profits of insurers and create “hard market” conditions. Three of the most significant are:
Raised spare capital requirements
In 2016, the EU implemented Solvency II, which was a regime aimed at harmonising regulatory requirements for insurers across Europe. As a result of this, many UK insurance providers had to significantly increase their spare capital requirements.
As you may expect, this caused many insurers to leave the market, with the ones who remained having to reduce their underwriting capacity and lower their risk tolerance.
The impact of climate change
The insurance industry has experienced a high loss ratio in recent years, partially caused by an increase in natural disasters, which caused significant amounts of property damage.
Coupled with low premiums, this has caused many insurance providers to struggle financially. This was only made worse by the significant number of storms and floods in recent years. According to figures published in the Guardian, Storm Dennis alone, which hit the UK in early 2020, was estimated to have cost insurers more than £225 million.
Periods of extreme weather can cause many issues, from flooding to subsidence. This has meant that many insurers are having to pay out more regularly, costing them significant amounts of money.
Increased costs of rebuilding property
As you may know, when you’re insuring a building, most policies will require you to select a “sum insured”. Essentially, this figure reflects how much it would cost you to completely rebuild the property from the ground up in case of disaster.
Typically, the rebuild cost of a property increases in line with inflation, as labour and building materials cost more. However, the impact of the coronavirus pandemic has caused these costs to jump in recent months, as global trade has been disrupted.
According to a report published in the Guardian, the average price of steel and copper has increased by 40% since December, while the price of timber has almost doubled.
Since properties now cost more to rebuild, the cost of a potential insurance claim will also increase. If insurers want to be able to continue to operate, they must increase their premiums.
Working with an insurance broker can help to find the cover that’s right for you
As we mentioned earlier, when the market begins to harden, many insurers look to raise their premiums and restrict the cover their policies provide. What this means for you is that not only will insuring your property be more expensive, but it may also be harder to make a claim when you need to.
In recent weeks, the UK has been hit by significant storms that have caused localised flooding. According to figures from the Met Office and Environment Agency, reported in the Guardian, London and nearby counties experienced up to 48.5mm of rain on 25 July. This is the amount that would typically fall in a month, not a single day.
As these flash floods can teach us, having protection in place can be invaluable for giving you peace of mind if the unexpected were ever to happen. If you want to ensure that you have the right cover for you, it’s important to speak to a professional.
Working with a broker can have a myriad of benefits, as they can use their expertise to find the right product to suit your needs. Since they work with many insurance providers, they often know which are the best to approach for different types of cover.
Furthermore, they can also help you if you ever need to make a claim, as they can work with your insurance provider on your behalf. This can save you a considerable amount of time and hassle.
While the market may be hardening, working with a specialist broker can help to give you greater peace of mind to know that you’re getting the best deal for you.
Get in touch
If you want to work with a broker to ensure you have the right cover with a competitive premium, get in touch. Email insurance@eggarforrester.com or speak to a member of our expert team on 0207 382 7710.