Our Real Estate team continued to grow in 2020 despite all the challenges, with three new hires joining us, further strengthening our capabilities particularly in the rapidly growing area of Real Estate Warranty & Indemnity, Tax and Contingency insurance. 2021 looks set to be a continuation of 2020 as far as pressures on the insurance market are concerned – we are undoubtedly in a hard market for the majority of lines of business, although pockets of opportunity still exist as insurers look to adapt and respond to rapidly changing demands from the industry.
With the recent Supreme Court decision on the FCA Business Interruption test case comes some clarity around many important coverage aspects of COVID-19, which clarity will help our sector; however at 112 pages, it may take some weeks for us and insurers to fully understand the practical implications this has. Ensuring you have a broker who has their finger on the pulse and the expertise to navigate these challenging conditions is perhaps more important than ever. We hope you find our update helpful, and as always, please do not hesitate to contact us should you wish to discuss further.
UK Property Reinsurance - January 2021
Since the reinsurance markets are one of, if not the key driver behind the Real Estate insurance market, reinsurers’ January 2021 renewals are a good place to start our market update. Our colleagues at Gallagher Re have seen a tightening reinsurance marketplace with modest remedial rating action applied in property segments and geographies where losses have been minimal or absent, such as the UK. Had losses occurred, the reinsurers’ response would no doubt have been a lot tougher. These trends, with the same caveat, are likely to continue throughout 2021 for UK exposed businesses.
By 1st January, a Communicable Disease Exclusion and Cyber Exclusions were a pre-requisite on all UK property reinsurance – however reinsurance capacity for UK exposed business has been adequate and reinsurance programmes have been completed.
In times of uncertainty, people tend to become more risk averse. COVID-19 has shown insurers that significant correlations exist between the asset and liability sides of their balance sheets, which they may or may not have considered in the past.
In the UK, insurers of all sizes have been reviewing their retentions and risk management strategies, and almost all have been buying more cover. Some are buying more aggregate excess of loss to protect against unforeseen frequencies at the tail, and some are buying lower on per event and per risk covers that protect against middle-sized losses.
UK Real Estate Insurance Market Overview
As discussed in our market updates during 2020, the UK Real Estate insurance market has seen a dramatic change over the last 18 months. Principally due to a lack of profitability seen by insurers, we have seen considerable increases in pricing and a corresponding reduction in appetite – with this trend expected to continue into 2021.
As a result of these sustained losses, insurers have moved quickly and taken a number of measures to attempt to improve their position;
- Withdrawing completely from certain lines of business, notably;
- Residential risks
- High Hazard
- Poorly managed portfolios
- Reducing the amount of capacity they are willing to deploy
- Insurers looking to minimise their exposure on certain risks where previously they would have been comfortable insuring 100% of the exposure
- Increased pricing
- Rating increases across all sectors, even claim-free portfolios
- Increased excesses
- Long term standard excesses being increased for the first time in number of years; moving away from nil excess on material damage
- Withdrawing completely
- Certain markets have walked away from Real Estate completely – reducing competition and therefore driving pricing up amongst those that remain.
In addition to the above, the impact of COVID-19, the subsequent FCA Business Interruption Test Case and ongoing legal proceedings have resulted in uncertainty around where business interruption claims may finally land. As a consequence, insurers continue to be nervous and hold reserves for these potential losses.
Furthermore, insurers have either already reviewed or are currently still reviewing their policy wordings to either removing disease coverage in its entirety or sub limiting those sections of their wording.
Lending Due Diligence Market Update
As with all sectors in 2020, the lending market experienced challenges throughout the year as a result of the global pandemic. Whilst there was a downturn in the volume of transactions across the Real Estate lending market in Q2 and the beginning of Q3, there was a positive upturn in deal numbers towards the latter part of Q3 and this continued to the end of the year.
There has been a clear change in appetite for a number of lenders in the Real Estate space; perhaps predictably there are fewer retail and hospitality transactions taking place with the fortunes of retail/hospitality properties being as volatile as they are. There is however a focus on industrial portfolios along with assets with a clear sustainable future such as data centres.
It is expected that the strong end to 2020 will continue through into 2021, however the focus will remain on those sectors that are deemed stable and ‘safe’.
Whilst the outlook for transactions in this space looks to be positive for 2021, it is prudent to note as highlighted above that the property insurance market continues to be in a difficult cycle whereby capacity is reduced and the flexibility of insurers is limited when compared to 12-18 months ago. It is therefore imperative for lenders to instruct their insurance advisor from the outset of each deal in order to ensure they benefit from correct market communication and ultimately the insurance policies are sufficient to protect the lenders needs and adequately cover the assets in question.
Legal Indemnities Update
The title insurance market had a problematic 2020, with fewer transactions taking place – as a result, premium incomes were down, resulting in redundancies being made. In spite of this, the market remains competitive on premium and there is sufficient competition among insurers.
In terms of M&A movement, Titlesolv was purchased by Westcor and Secure Legal Title was acquired by AXA, bringing them in house to look at their book as they provide capacity to other Managing General Agents (MGAs). Legal & Contingency have diversified their book by bringing in a Real Estate underwriter to focus on property insurance and Zurich are expanding their European offering. Dual’s capacity reduced to GBP500m at the beginning of the pandemic but has returned to the GBP1bni that they previously had and Fidelis, one of their insurers, has an increased rating of AM Best A from A-.
Overall, we expect 2021 to be a more positive year for the title market; although re-insurance rates will be rising, we envisage the market remaining buoyant and competitive, with claims being paid within reasonable timescales.
Construction Insurance Market for Refurbishments & Extensions Update
The cover available for refurbishment works has changed significantly in recent years. Due to a number of substantial high profile losses including Glasgow School of Arts, Mandarin Oriental and Primark (Belfast), this sector was at the leading edge of hardening market changes. The practical implications of this include;
- Reduced ability to insure the existing structure as part of the works insurance programme. While in the past existing structures valued over and above the construction works could be covered by extension to the Construction “All Risks” insurance, this is no longer the case and recent projects have shown no appetite for offering cover where existing structures are valued at over 50% of new construction costs.
- Certain insurers have withdrawn entirely from the refurb market, declining to cover even the works in isolation.
This means an increased focus on contract drafting and apportionment of risk. The traditional use of JCT D&B Option C, whereby the Employer gives the Contractor protection in respect of damage to existing structures caused by specified perils, is often unachievable due to resistance from construction and property insurance markets meaning it often becomes a third party risk to Contractors. This in turn creates challenging commercial negotiations around equitable allocation of risk and additional insurance requirements.
Given the current market conditions we do not anticipate any improvement in this position from the insurers in the short to medium term and therefore reiterate that early engagement and negotiation remains the best way to ensure this potentially major issue does not delay commencement of works.
Real Estate Warranties & Indemnities (W&I) Update
Perhaps in contrast to most other insurance markets, the W&I and tax insurance market continues to innovate, develop and grow within the Real Estate space. Nil seller liability for warranties is becoming the norm and deals that would have previously fallen overdue to adverse due diligence findings are now completing with the help of M&A insurance.
With new M&A markets and MGAs being set up every few months, insurers are desperate to differentiate themselves through reduced premiums and additional enhancements. Coverage for known tax and contingent risks are now becoming much more common, so that buyer and seller can transfer these risks to an insurer upon completion.
2021 is undoubtedly set to be another challenging year economically, and the insurance market will be no exception. At the time of writing, there are limited signs of new entrants to the mainstream Real Estate market, bringing fresh appetite and capacity – meaning trading conditions in 2021 are set to be tough once more. Our advice to our audience however remains the same;
- Be proactive
- Engage with us early on
- Provide comprehensive information
- Engage with experts.
These are still the keys to a successful insurance placement in a challenging market. With a team of almost 50 experienced professionals focussed purely on the Real Estate sector, we remain confident of being able to achieve favourable outcomes for our clients.
This note is not intended to give legal or financial advice, and, accordingly, it should not be relied upon for such. It should not be regarded as a comprehensive statement of the law and/or market practice in this area. In preparing this note we have relied on information sourced from third parties and we make no claims as to the completeness or accuracy of the information contained herein. It reflects our understanding as at 27 January 2021, but you will recognise that matters concerning COVID-19 are fast changing across the world. You should not act upon information in this bulletin nor determine not to act, without first seeking specific legal and/or specialist advice. Our advice to our clients is as an insurance broker and is provided subject to specific terms and conditions, the terms of which take precedence over any representations in this document. No third party to whom this is passed can rely on it. We and our officers, employees or agents shall not be responsible for any loss whatsoever arising from the recipient’s reliance upon any information we provide herein and exclude liability for the content to fullest extent permitted by law. Should you require advice about your specific insurance arrangements or specific claim circumstances, please get in touch with your usual contact at Gallagher Real Estate.