16 January 2023
Real Estate Insurance Market Outlook for 2023
If 2020 and 2021 were the ‘unprecedented years,’ then there was perhaps slightly more precedence for 2022 — or at least for approximately the first seven weeks, until Russia invaded Ukraine. The ongoing conflict rocked the global economy, and the insurance market was not immune. Once you consider the impacts of Hurricanes Ian, Nicole and Fiona, the devastating floods in Pakistan, and the heatwave that vast swathes of Europe experienced last summer, 2022 feels like the year where the impacts of global warming were felt truly globally perhaps for the first time.
All of the above led to a turbulent real estate insurance market in 2022, as claims fed through into the industry. Some of the pricing pressure felt in the previous 24 months eased, but this was replaced by inflationary pressures forcing values up sharply, and resulting in premium increases nonetheless.
Clients’ number one focus is now clearly ESG, as a combination of investor, regulatory and moral pressure combines to weigh heavily on those who own large volumes of carbon-emitting property. In the following series of updates, we attempt to forecast what all this means as we enter 2023, and where we expect the market to be as renewals come around thick and fast once more.
Property re-insurance
During 2022’s annual Monte Carlo Rendez-Vous de Septembre (RVS) the assembly indicated a hardening property market — and that was prior to the fundamental European Property Market pressures that then played out post Hurricane Ian in Q4 2022. A very late renewal market evolved, which turned through November and December from a hardening market closer to a hard market, driven by underwriting discipline rather than a shortage of capacity.
During the final two months of 2022, European insurers ended up largely bowing to reinsurers’ requests — and as a result, a decade of downwards cycle in the European property market was re-set in the space of a couple of weeks.
Despite the inflation driven increases on programmes that often already represented a double-digit percentage increase, most renewals were up by at least a further +20%s to low +40%s. Early fears of limited key perils capacity (such as European wind cover) and the inability of reinsurers to satisfy additional capacity requests didn’t materialise as numerous reinsurers were willing to expand their deployed capacity, but only at the right price.
“During the final two months of 2022, European insurers ended up largely bowing to reinsurers’ requests – and as a result, a decade of downwards cycle in the European property market was re-set in the space of a couple of weeks.”
UK Real Estate Insurance Market
In the context of the above, there is no doubt that this reinsurance pricing pressure will have some impact on insurance market rates as we enter 2023. As alluded to in the introduction, the UK insurance market has experienced extensive rate correction over the past two years after a long period of overly competitive pricing; and although there is now a slight softening of the market going into 2023, we still do not foresee the introduction of consistent and significant rate reductions.
Where rating correction has worked and insurers are comfortable with their pricing, we are now seeing single digit rate increases. In rare cases where flat rates are being offered, it’s worth noting that these are generally only for the most attractive asset classes, and for the most profitable and well-managed risks. Long term deals and rate stability agreements are now being introduced by some insurers as they see the market starting to soften and attempt to lock in ‘good’ business.
Capacity still remains limited in certain sectors and insurers are rarely offering to cover 100% of risks so we are seeing a number of risks with multiple insurers on the panel; this continues to create challenges around wording agreements due to multiple carriers needing to agree certain clauses.
High indexation of property values continues to drive increases in pricing at renewal. It is becoming more important than ever to ensure properties are valued correctly and regularly to proactively manage potential exposure to under-insurance. With inflation at its highest level for a number of years policy holders can’t rely entirely on index linking to safeguard them from underinsurance. Index linking is an average and doesn’t take important factors into account such as the materials from which your building is constructed and the property location. Checking the policy wording and reviewing the detail of any average clause is extremely important to ensure you are compliant and underinsurance will not be considered by insurers.
Quality information and good claims data continue to be the two key factors in order to get preferential rating from insurers. Well-presented risks highlighting well managed portfolios alongside robust risk management programmes are welcomed by insurers and can generally still attract competitive rates and cover.
European Real Estate Insurance Market
In terms of the wider insurance market in Europe, the rate trends experienced in the UK have followed the same course across the majority of territories on the continent, notably in France, Germany, Spain, Netherlands and Belgium. Rate increases in the last two years have been on average between 15%-30% and there has been a real focus on quality of underwriting information and COPE on new business in particular, in order for insurers to be prepared to offer any meaningful terms. Rate increases are expected to continue in 2023, but this is more likely to be single digit given continuing poor underwriting results as a result of catastrophe losses in 2022 — Spain, Portugal and Italy were hit hard by floods in 2022. Certain territories such as Spain and France will fare better in this regard, given that much of the catastrophe risk is covered under the local pools, however the local pool rates themselves will be subject to review in 2023.
The on-going war between Russia and Ukraine continues to affect many territories on the continent with the cost of raw materials, labour and rising energy costs impacting building indexation, with record levels being experienced in Germany — currently 17.7% in Q1 in 2023.
European insurers are cautious about deploying large amounts of capacity on certain risks and it still remains common market practice for larger risks to be scheduled across three or four insurers with continuing restrictions on cover and exclusions being applied, such as on cyber and contagious diseases. Interestingly, certain European territories have sought support from Gallagher’s Real Estate team in the London insurance market for capacity and additional cover where this has become limited or unavailable in the local market.
European insurers are cautious on deploying large amounts of capacity on certain risks and it still remains common market practice for larger risks to be scheduled across three or four insurers with continuing restrictions on cover and exclusions being applied, such as on cyber and contagious diseases.
Transactional Risks, M&A and Tax insurance
The European M&A landscape has been fragile in recent months. Whilst another bumper year was expected following the unprecedented uptick at the end of 2021, the outbreak of the Ukrainian war started to slow things down.
Having expanded their servicing teams in early 2022 to make up for the lack of capacity to underwrite a few months earlier, insurers were eager to differentiate themselves towards the middle of 2022. The downturn in M&A activity caused by the fluctuating economy also led to an increase in competition to win business, which in turn has been reflected in the terms being offered.
Premium rates broadly remained consistent with 2021, although there have been signs that these have started to drop off again. What has become clearer is that rates are unlikely to drop substantially in the near future given the surge in claims. However, as we enter 2023, it is very difficult to see rates increasing either given the heightened competition and future economic outlook.
Almost all jurisdictions in Europe have become insurable, with the exception of Ukraine, Russia and Belarus. Insurers continue to differentiate themselves (or match their competitors) by opening up in new territories, with W&I in Southern Europe growing at a very fast pace.
Germany and the Nordics continue to be market leaders in the use of M&A insurers, however Poland, Italy, Spain, Portugal, France and the Benelux region are catching up. Language capabilities continue to be of paramount importance, with most insurers now being equipped to deal with transaction documents written in a number of languages.
The Real Estate M&A insurance sector will continue to evolve and persevere, despite the somewhat confused outlook. The use of W&I, Tax and Contingent Risk is now an integral part of the vast majority of Real Estate deal processes and insurers will consistently differentiate themselves by offering new coverage and execution enhancements. What is likely though is a continued competitive tension, which may result in premium reductions.
"The downturn in M&A activity caused by the fluctuating economy also led to an increase in competition to win business, which in turn has been reflected in the terms being offered."
Legal Indemnities insurance market
Due to of an increase in claims, we have seen insurance rates within the legal indemnity/title insurance market slowly increasing, particularly with regards to Rights of Light coverage. Simultaneously we are seeing capacity reduce further due to insurer’s reducing lines with some Managing General Agents. This has significantly decreased one insurers line of cover. This also means that the Title to Shares market has decreased, which could see rates increase.
As suggested in our last update, we are now seeing more Agreed Conduct policies, and Rights of Light insurance policies are changing too. New policy types are emerging in response to the volatile economic climate; providing insureds the flexibility needed in order to provide balance sheet protection when developing, acquiring or lending against assets.
We expect this trend to continue into 2023.
Focus on: Rights of Light
There has been an increase in claims and ‘ambulance chaser’ firms are particularly targeting developments with residential properties nearby. This has changed the style of policy offered; excesses are now generally the same, if not more, than book values in Rights of Light reports. The strategy has now largely moved to an agreed conduct style of cover, rather than ‘wait and see’, meaning that the insured will need to negotiate a release within the excess.
This means that the policy is now essentially acting as a ‘catastrophe’ policy, whereby the policy responds in a worst-case catastrophe scenario for the insured, such as failure to negotiate the release of rights, or an injunction.
We have seen claims paid this year that are over three times the book value reported and though this is not the norm, it is something to consider when considering policy options in 2023.
Focus on: Title to Shares / Real Estate
The title to shares market has taken a hit as one provider has reduced capacity. However, there still remains plenty of available capacity overall, with other insurers able to sit in excess of policies. Title to real estate has not been affected, and we are still able to access over GBP1bn of cover with a single insurer.
There may be some additional capacity into the market in 2023; we expect insurers to capitalise on the premium increases and high demand.
Focus on: Certificate of Title Top Up
An embryonic policy that ‘tops up’ a certificate of title during a financing. Where professional indemnity insurance rates have been rising, some lawyers are looking to limit their liability, including caps on their certificates of title. Some lenders are not comfortable with this and borrowers are faced with increased costs.
This policy sits in excess of the liability cap to cover losses in excess of the certificate of title. We expect this policy to feature heavily in financings over the next 12 months.
Due Diligence/Real Estate lenders update
The real estate lending market remains in a challenging space as we enter 2023. High interest rates and political volatility have created an overall sense of uncertainty, felt by borrowers and debt providers. A sense of caution is clear from our lender clients, who, whilst keen to retain deal flow, are adopting a significantly more selective approach in their chosen financings to protect their long term position. Nevertheless, the increase in alternative lenders / debt funds with greater flexibility continues to create new funding opportunities for borrowers, which we anticipate will continue to develop in 2023.
Insurance wise, there remains capacity from insurers who are willing to accommodate lenders’ requirements specified in their facility agreements; however, the hardened state of the property insurance market as a whole has resulted in many insurers adopting a less flexible approach when amending their policies in line with individual lender requirements to limit their exposure. It therefore remains crucial to ensure that appropriate diligence is carried out from a lender perspective to guarantee that adequate protections are in place on borrower insurance programmes.
Conclusion
It is clear that whilst some areas of real estate insurance are plateauing or even softening ever so slightly, the overall macro trend is one of a hard market — where prices remain high, coverage restricted, and insurers remain highly selective of the risks they wish to underwrite. As a result, there are a number of important actions one can take to obtain best pricing and coverage.
- Work with a specialist real estate broker who understands how to effectively articulate your risks, and differentiate them from the competition
- Work with your broker to build a tripartite relationship with your insurer, as achieving their buy-in is crucial
- Quality underwriting information is more crucial than ever. Knowing the granular detail of your assets and tenants, and having a demonstrable, proactive approach to risk management will position you in the best light
If the last three years have taught us anything, it is that predictions in the 2020’s are futile – however insurance remains an industry underpinned by fundamentals. Get those right and you put yourself in the best position possible to capitalise on changes as, inevitably, they happen.
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Arthur J. Gallagher (UK) Limited is authorised and regulated by the Financial Conduct Authority. Registered Office: The Walbrook Building, 25 Walbrook, London EC4N 8AW. Registered in England and Wales. Company Number: 119013.