Property Focus: The shape of things to come

Three lines of business: small/package risks, large property risks and property owners/investors cover were considered by the Insurance Times’ survey which was completed by insurers Aviva, AXA, Groupama, MMA, QBE and Zurich.

Small/package risks

The key issues for this sub-sector were pricing, demand for cover and rising claims frequency.

Respondents said that premium rates would rise, but there were cautionary undertones from some underwriters who warned of inertia in rate increases.

There were also warnings from the majority of underwriters that demand could begin to decline as a result of the economic climate. Claims frequency was also expected to increase as the recession took its toll on the sector.

All respondents said that premium rates would increase by a small amount over the next six months, probably by single-digits. But there were some concerns. One insurer said: “The market is not hardening as quickly as expected and only small increases are being carried. This is expected to continue for the remainder of 2009.”

Another underwriter pointed to the dislocation between renewal and new business pricing. “[The market is] carrying 5% increases on many renewals but [this is] undermined by continuing aggressive pricing on new business by most insurers.”

However the same underwriter added: “There are signs that increases of up to 10% will be more commonplace in the second half of 2009 [for acceptable business] with more focused underwriting action on poorer performing risks.”

The respondents indicated some growth in demand over the past six months, with a third reporting that demand had increased during the period. Some respondents warned that demand could decline as the recession continued.

“Demand is generally stable at present, but there are some signs of drop off due to business failures in the current economic climate,” said one respondent. The level of demand will be dependent upon confidence returning to the banking sector and business credit loosening up – allowing businesses to get back to pre-recession trading levels.”

One insurer noted that there had been a surge in requests for quotations in response to the rating increases imposed by other insurers, but added that it was starting to subside.

All insurers expected claims frequency to increase in the next six months to a year as a result of the economic conditions, with half reporting some increase over the past six months.

“Fraud, theft and arson claims tend to be more frequent in times of economic stress,” said one insurer.

The impact of these factors meant that the majority of respondents were expecting the profitability of this line of business to decline compared to last year. But one respondent said it would be more profitable than 2008 because that year was unusually unprofitable.

Large property risks

The picture that emerged in relation to the larger property risks was more complex than for the small/packaged risk. The majority of respondents expected rates and claims frequency to increase over the coming months and demand to fall or remain stable. Capacity was also expected to fall.

There were mixed views on the outlook for policy coverage. A majority of respondents (60%) expected market capacity to fall in the next six months. The remaining respondents, however, said capacity had remained stable.

“Capacity has reduced a little and underwriters have become more cautious about how they use it,” said one respondent.

Another said there was “evidence that some markets are cleaning out accounts and protecting current treaties in anticipation of a hardening reinsurance market.”

Although most respondents said policy terms and conditions would remain stable, some underwriters said clients were requesting that cover be broadened or narrowed. “Some banks are asking for wider cover,” noted one respondent, while another said: “Companies and clients will look to reduce cover to offset premium impacts.”

One respondent said that while there was generally no change to cover there was “some selective areas of narrowing cover in business interruption contingency (for example, infectious diseases)”.

In relation to demand for cover, many respondents (40%) expected demand to decline in the coming months because of the prevailing economic conditions. But some respondents noted that insurers could benefit from increased demand if they became more attractive markets as a result of rivals’ financial strength rating being downgraded.

The majority of respondents once again expected the profitability of this class to decline this year, owing to rising claims costs and rising reinsurance costs. One underwriter pointed to the fact that few insurers were properly pricing the impact of weather events. “Few insurers are building this into their technical price. Inevitably this decision will hurt a number when the next event occurs.”

Property owners’ risks

Rates, once again, were expected to increase for this line of business. Some respondents expected claims to increase in the coming months. Little change was predicted in capacity, policy coverage and demand for cover.

On pricing, underwriters spoke of small premium increases. “Property owner-type business (residential and commercial let) profitability has suffered as a result of recent weather (flood and freeze) events and underwriting results have deteriorated. A general rate increase is necessary to restore acceptable underwriting margins,” said one insurer. Another said: “Small premium increases are being sought in the market and achieved.”

A further underwriter noted: “Price increases are being resisted and there is no general move to repair balance sheets or make up loss of investment returns. Most increases are based on underperforming or underpriced business.”

There were mixed views on claims, with half the respondents expecting volumes to increase, while the remainder predicted levels to remain stable.

“As ever, this is dependent upon the weather and the economy. Unoccupied properties (for example, resulting from business failures or evictions due to non-payment of rent) tend to be a problem as they are often targets for vandalism/arson and suffer increased volumes/severity of water damage claims,” said one insurer.

Insurers said that demand for cover was expected to be generally stable in the coming months, although some had said the previous six months had seen demand increase slightly. Two respondents noted that there had been increased demand for quotations, owing to the rate increases imposed by some insurers that had prompted customers to look elsewhere.

In terms of the future profitability of this class, there was a mixture of views, with some predicting an increase compared to last year.

Half the respondents said profitability would decline.