The kamikaze world of property insurance

Property insurance rates have been in the mire for so long that an upturn always seemed around the corner. The good news, of sorts, is things cannot get any lower. The bad news is that any bounce back will not be evident until well into 2008. Therefore, competition is fierce and blood, sweat and tears will be shed before then.

It is the commercial market that has been hit most. Commercial property rates have been declining during 2005 and 2006 and are part of a cyclical reaction to some good market results.

These have arisen from a combination of strong rate increases in the early part of the decade following 9/11, benign weather and good investment returns.

Phil Bird, director of non-motor and SME at Groupama, says: "The positive nature of the market's property results has drawn capital into the market and created excess demand from insurers and this has had the effect of creating rating pressure as supply exceeds demand.

"This is currently being evidenced by some insurers allowing rating reductions of the order of 10%-15% on new business, with selective reductions for renewal business as well."

At the same time, further pressure on margins has resulted in some carriers agreeing enhanced commission deals with brokers that are either not reflected in their pricing or work transfer.

Bird adds: "There is also a suggestion that some underwriters have been prepared to accept cases and underwriting standards that in a hard market they would not have accepted."

Correction

All of this looks to lead to market results in 2007 that are nowhere near as strong as in previous years and bring pressure for a rating correction - something that the market certainly needs.

Bird says: "Of course, we still need to remember that 2006 is not yet over and if the market sees a major weather event that impacts reinsurance treaties we may yet experience some upwards pressure on rating from reinsurance costs and the impact on net lines."

This picture is supported Adam Boakes, UK development manager for broker-only SME insurer Evergreen. He says: "We are still seeing intense competition within the SME marketplace and it appears that technical rating as an underwriting discipline has been completely abandoned. Instead the philosophy of the majority of insurers appears to be 'any business, at any price'. Market share remains their sole objective with no apparent regard for either underwriting quality or profit."

And Boakes believes it is difficult to see any short-term change in market conditions due to excess of capacity to be filled. "Based on our historical trends, however, we would expect to see a leveling of rates over the next 18 months, as current pricing strategy is simply unsustainable.

"In the short term, however, top line growth would seem to be the only message that is being fed to the underwriting rooms as the kamikaze approach continues. If the light at the end of the tunnel has been switched on, then there must be a very low wattage bulb inside," says Boakes.

Analysis

There is no shortage of neutral analysis to highlight the plight of the property market. Datamonitor says the commercial property insurance market's gross written premiums (GWP) declined in 2005, following a slowdown in premium growth rates in 2004.

This is in the context of growth rates having fallen dramatically in the previous two years, from 24.3% in 2003, to only 2.8% in 2004. In 2005, it is estimated that GWP declined by 7.4 percentage points.

According to Aon, non-marine property premiums are likely to continue their downward trend this year and the bottom of the cycle is unlikely to be felt until the end of 2007.

Oliver Schofield, director of Aon global property practice group, says: "A clear divide is opening up between US and international risks and this is likely to be a main feature of the global property market in the coming year."

Aon's Global Market Property Tracker survey interestingly revealed that terrorism and natural disasters have not had a great impact on international property insurance rates - despite their continued slide.

Innovation

Brian Brown, head of general insurance at analysts Defaqto, says insurers have to become more innovative to have an edge in this market. "This is a tough market where success will require insurers to increasingly tailor their products to meet customer needs."

The area where Brown expects to see the most growth is in the mid-net worth market with insurers moving in to meet the demand created by the ownership of the higher value products that are finding their way into people's homes.

But it is the focus on new innovative products that insurers have to plug into. And the message presented by Defaqto that insurers will struggle in the current competitive property market to increase premiums and retain customers is a big warning.

It says that with a massive range of products available, insurers need to differentiate themselves from their competitors.

Price focused

In its report, Changing Policies for a Changing World, Defaqto repeats the view held by many in the market, that marketing continues to focused on price rather than on service or product features, making it even more difficult for the public to make an informed purchasing decisions.

Despite attempts by some leading companies to educate the general public that insurance should not be seen as a commodity product, whole swathes of the market persist with the price approach.

Looking at home insurance premiums offered by the majority of companies historically, they have remained largely static over the past 10 years and are likely to do so in the immediate future.

Cross selling

Looking ahead, it is likely that the banks will be the big winners with their ability to cross-sell to existing customers. "We can expect to see distribution patterns change as insurers try to reduce costs," says Brown.

"This is most evident from the increasing use of the internet for purchase as well as research in the home insurance market. However, the use of web aggregators - comparison sites offering quotes from many insurers - means that individual insurers will have to work harder to attract and retain customers."

And the worry is that brokers will not be able to deal with customers on websites and through emails and will struggle to survive.

This is bad news for brokers. But one broker disagrees. "This is nonsense. Banks have failed in every part of financial services they have entered as a new market. Where is the likes of Natwest if this is a real challenge?" says the broker.

He claims there is a regulation issue here. "When banks use leverage from the money they lend people to sell insurance, isn't that breaking some conflict of interest rules?"

Cost cutting

But with increased competition, insurers have been taking a number of steps to remain competitive. These include reducing administration expenses through the use of offshore staffing, reducing claims costs, minimising acquisition costs and improving claims handling procedures.

"Many insurers are also making better use of use of repair management companies and an increasing number are directing customers to purchase online," says Brown.

Niche player

One company that is benefiting and taking advantage of the innovative trend in property offering is Ecclesiastical Insurance. Chris Lees, chief underwriting manager at Ecclesiastical Insurance, says: "We have not seen the bottoming out like the bigger, leading players have, because we work in such a niche area.

"We work heavily with brokers to be as innovative as possible with products specifically designed through strong relationships. So the price factor is not that important for us."

Ecclesiastical covers property in the care sector, independent education and church buildings.

Brokers have adapted to the perils of the property market, says Paul Maynard, broker director for UK and Ireland at Willis. "Brokers always adjust to the market conditions and the current situation plays into the hands of a client, because the rates going are not high."

And he puts a different perspective on the whole outlook. "It is a tough market. But the last 12 months in property in reality have not been that bad, as most companies are going to make money out of this period."

POSSIBLE MARKET DEVELOPMENTS

Defaqto believes that there will be a number of significant changes in the home insurance market over the next two to three years:

- Brokers that are unable to deal with customers on websites and through emails will struggle to survive;

- New types of cover and product changes will become more frequent;

- More items of cover will become optional;

- Insurers will move into the higher value end of the market.