A look into the future

The immediate future for the property market does not look rosy, says Willis UK & Ireland, property team executive director Richard O’Keeffe. “The UK market has been softening steadily over the past few years. It will remain soft through 2008, and there are likely to be further reductions,” he says.

The extent of the reductions depend on the type of business, but he expects rates for 2008 to vary between flat and 20%.

Overcapacity in the market is a key factor in this. “There is a wealth of capacity in the market which will continue to encourage price-based competition. The market is saturated and people are writing for chunks of business.”

In addition, lack of underwriting discipline and an abandonment by insurers of their technical pricing are contributing to the continuing soft property insurance market, he says. The only area to show some resistance to rate reductions will be food processing property risks, due to its claims history. “That really is the only area where people are being cautious. That’s the one sector that has delivered most of the losses outside the floods.”

O’Keeffe says that beyond the sheer damage of the past 12 months’ floods, they may prompt insurers to further scrutinise their forecasting models for property risks over the coming year.

“The models that they use to forecast are more tuned to wind events and are a bit less skilful in terms of flooding. So that has to be looked at carefully,” says O’Keeffe.

The soft market conditions and the extremes of competitiveness are forcing insurers to be more innovative in the way they attract new business, with longer deals set to feature more prominently over the coming 12 months. “Several insurers are looking at providing long term deals with increased rates in year two and three. Clients and brokers are pushing for cancellations and rewrites in order to secure the current competitive terms for a longer period.”

So when will the market begin to turn? “Several insurers claim to be actively looking at their books which could be a sign that the market could turn,” says O’Keeffe. “But they are not going to adjust their business until it starts to bite.”

Insurers expected the market to harden faster than it has, says Mark George, director of client development at Cunningham Lindsey. “Competition in the market is keeping rates lower then anticipated,” he says.“Clearly the 2007 floods were the most significant events in the last 12 months, and the most significant weather event in many years if you look at the pure cost of the damage.”

Given the scale of the event and the cost to the industry, George is surprised that rates have not responded to the floods. “It is a surprise that the property world has not been able to harden its rates given the £3bn of expenditure on the floods. If there is another event, it just might happen.”

A side effect of the continuing soft market within property is an increased focus on cost management within the supply chain – another trend likely to continue. “The question is how can you be even more innovative, more resourceful and also better at managing claims,” says George. “It’s not just cost, although cost is a significant element in a soft market. What it means for the supply is more competition, and perhaps being more willing to try out things that might offer more cost savings.”

In other words, the continuing soft market conditions are driving innovation within the property sector. With them set to continue for the foreseeable future, the next 12 months could be a period of significant developments within the market.

“All our clients have been saying ‘come on, what’s your next idea then’; there’s no breathing space, it’s just constant.”

Changes within the insurance market, with the rise of broker consolidators and insurance aggregators, could see the next 12 months being key in the new battle for commissions within the property market, says George.

“The growth of new distribution channels is shifting power from the insurers to the distributors. These business models are coming to fruition and now seem to be driving the technical benefits that they bring,” he says.

The large consolidating brokers have been pushing insurers on commission levels on property business, with the coming year set to be a key period for that battle.

“The next 12 months is going to be an interesting situation as to where the commission will come back to and where the balance of power is going to lie. The composite insurers are girding themselves for this, but there are probably some people who are prepared to buy their way into the market. It’s an interesting dynamic.”

Looking further ahead, this time next year could see it on the point of change. “Beyond the end of 2008, insurers expect to see the market improving in 2009. Another year of sustained underwriting pressure, and an event, or a series of events and the rates will inevitably have to harden,” says George.

The property market remains ultra competitive, says Graham White, head of property at Zurich, with the floods of 2007, having had little ‘

‘ impact on rates. The appetite for business, he says, means the next 12 months will be tough.

“The market appears to have ignored all of these factors [from the floods] in that it continues to steer an ever more energetic path of new business at any price,” says White.

“The overall market is writing at a rate that we see as unsustainable. The outlook for the next 12 months is quite negative unless the market changes and people realise that they can’t sustain that pricing very long. But I don’t get that impression from what I see and hear in the market,” he adds.

The harsh financial lesson provided by the 2007 floods appears to have had surprisingly little impact on the property market, says White.

“Property is still one of the most competitive parts of the market today. I would wonder why that is, as our losses [from the floods] have been reflected across the industry. I would have expected companies that were not as well placed for those losses to have repositioned.”

White adds: “It seems to me that they are working on a gamble – saying we had a bad year but it can’t happen again this year, and are still trying to meet their new business targets. It will be a very soft market over the next 12 months. I don’t think the market will turn until 2010.”

Abandoning the discipline of technical pricing is again listed as one of White’s key concerns over the next year. “In certain ways I don’t think people understand it. I don’t see the industry underwriting for or putting processes in place for a catastrophic event, and that’s a concern,” says White.

“The one area that people need to understand is the technical price, and I think a lot of people think the technical price is the market price, which is the price that you need to get something on to your books, and that’s wrong,” he adds.

White predicts that another feature of the property market over the forthcoming 12 months will be a rise in the number of two to three-year deals being offered. “There has been a re-emergence of writing long term deals. People in a soft market are looking for different ways of doing business. Brokers are thinking that the market will turn in a couple of years so are protecting their clients and their business,” he says.

The SME property market will also move towards light touch underwriting over the next year. “It’s pretty automated, and the SME market will become more automated,” he adds, adding that it is a means of keeping costs down.

Environmental concerns may also increasingly make a mark on the property market as building regulations are changed to reflect more environmentally-friendly trends, such as new construction techniques and increased insulation.

“The immediate impact is that it is pushing up the costs on rebuilds. As the regulations increase there will be issues with reinstatement costs.” But as time goes on, being carbon neutral and reacting to the changing environment will come more to the fore.

From a regulatory point of view, the agreement between the insurance industry and the government on the provision of flood insurance was last updated in 2005. “We are discussing directly with the government and agencies about what we could do and what needs changing,” says White.

The result of those discussions, especially in the light of the 2007 floods, could have a major impact on the property market. It’s by no means a done deal,” he concludes.