Property insurance premium hikes – how to temper the bad news.
No one likes to be the bearer of bad news and having to pass on premium increases to your clients is unlikely to be the easiest conversation you’ll have.
As both residential and commercial property markets continue to harden, it’s unfortunately an ongoing situation that you will need to justify.
Here’s some suggested ways to help you explain the situation to your clients.
Ways to explain property insurance premium hikes
There are a number of factors involved but the two main ones at work are: the cost of rebuilding or repairs and the Insurers needing additional rate strength to balance their loss-making books. Add to that rising inflation and a host of other economic factors, it’s no wonder premiums are rising.
Global challenges
Building costs have shot up due to inflation, the rising costs of materials, impacted by global shortages of materials and supply challenges caused by BREXIT. In addition, the impact of the conflict between Russia and Ukraine – where 13 per cent of the UK’s steel imports are sourced, has led to price increases. There have also been steep rises in the cost of fuel, hence transportation costs escalating, combined with an increase in demand.
Logistics issues resulted in unprecedented shortages, delays and ultimately increases in prices of materials across the board1.
Going green is costing money
Regulation changes introduced by central government in relation to decarbonisation and ventilation to help the UK reach its 2050 net-zero targets that are also increasing costs.
Additional factors impacting on insurance premiums that you can share, include; –
Rising inflation
Inflation is rising and according to the Consumer Prices Index, hitting 9.4% in June of 2022; the highest rate since records began. KPMG forecast average inflation over 2022 at 8.1%,
Cost of materials
The overall cost of materials is also rising. Figures from the BCIS Materials Cost Index show costs at a 40-year high and indications are that costs of raw materials are expected to more than treble in 2022. Add to that the chronic labour shortage caused by Brexit and Covid- and we’re seeing supply chains in crisis2. According to data from the CII, UK insurers are looking at an increase of 9.6% to cover rebuild cost inflation.
Climate change
Climate change means more unpredictable and severe weather events. Insurance losses for Storm Eunice alone (February 2022) are predicted to be around £200-£350 million. When insurers are unable to predict future risks, reinsurance terms are harder to negotiate, with the costs being passed on to property owners. Plus, it’s not just losses in the UK that impact on loss ratios.
Changing methods of construction and design
The evolution of construction methods is also making an impact. Modern buildings are less able to withstand fires, floods and storms. Plus, the trend for open plan living and working makes it harder to contain any fires.
The pandemic
Since the COVID-19 pandemic hit the UK in 2020 we’ve seen rising inflation, severe business interruption, and increased insurance claims. Estimates suggest it has cost the insurance industry in excess of £200 billion. With such high pay-outs, UK insurers have had no choice but to buckle up and watch rates harden.
Unsustainable loss ratios
Finally, property insurance premiums have been artificially low for many years. As a result, insurers’ combined operating ratios often exceed 100%, meaning the cost of providing property cover has been higher for insurers than the premium received. Insurers are now experiencing an increase in the number of claims being made and the cost of those claims.
The impact on your property owners and landlord clients
These soaring rebuild costs have meant the majority of commercial properties and property portfolios are now underinsured. That means there are a lot of vulnerable properties across the UK – an issue that you are no doubt bringing to the attention of your clients.
It is important to emphasise that for insurance to be effective, properties need to be insured for the amount it would cost to rebuild them. But the rise in construction costs means that many buildings are now covered for just a percentage of that – leaving many owners and landlords out of pocket if they had to make a claim.
Whilst undoubtedly these higher rebuild costs are leading to higher premiums, it’s important that your clients appreciate that the increase in insurance premiums will be trivial compared to the potential insurance deficit if a claim has to be made.
For more information and advice contact Mi Property on 023 9224 8790 or email brokers@mi-property.co.uk
1 https://www.investmentmonitor.ai/sectors/construction/rise-material-costs-uk-construction-industry
2 https://www.ft.com/content/76be7676-879e-4304-95d5-6ae96c1e1507
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