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‘Hardening Market’ – What has caused insurance premiums to rise?

In 2020 we have seen increased buildings premiums from insurers that are often hard to swallow for our clients, but what has caused them to rise?  On average the property market has seen 20% increase in premiums this year.

Below we explain some of the reasons behind the now ‘hardened’ commercial real estate market.

Background For the last 10 -15 years the commercial real estate market has been ‘soft’ which has meant static or decreasing premium rates unless there was a particularly adverse claims history (the premium payable would rise with index linking of the amount insured at each renewal). There was a lot of capacity in the market and insurers were actively competing on rates to attract new business.

A number of factors have come together to cause underwriters to switch their approach from a rate based position to a future risk perspective which has resulted in a much hardened market with a reduced appetite for acquiring new risks and reduced capacity due to some insurers withdrawing from the market altogether.

Increasing claims costs have meant that pre 2020 property insurance rates were unsustainably low.  Claims, particularly resulting from escape of water in blocks of flats, have increased in both frequency and cost which has meant that insurers have paid out more than they have earnt in premiums and increased rates are being applied in an attempt to balance their books.

Storms for example Ciara and Dennis resulted in further losses for insurers amounting to over £400m in flood claims.  The effects of climate change are making storms more frequent and more severe increasing insurers risk of exposure to future claims.

COVID-19, with the Financial Conduct Authority having sought clarity from the High Court in September 2020 to guide, if and how, insurers settle Business Interruption claims, they are now encouraging insurers where possible to settle claims as quickly as possible.  Some insurers will be waiting to see if specific points in the judgement will be appealed.  This finding will hit insurers hard.  Lloyd’s of London is expecting to pay out up to £5 billion in claims.  To mitigate, we have seen insurers bring in exclusions for any claims where the proximate cause relates to ‘diseases’ that lead to a pandemic.

Reinsurance rates are significantly rising for insurers.  Reinsurance forms a key part of an insurers pricing strategy and they will have no option but to pass on the increases to policyholders.

Low interest rates over several years has impacted insurers ability to reserve against future claims as their investment income has been eroded with no foreseeable hope of future improvement.

Personal injury claims costs have increased as a result of changes to the Ogden table, which are used to calculate lump sum compensation due in personal injury and fatal accident cases.

The introduction of Solvency II in 2009 more than doubled the amount of capital the insurer needs to hold causing several insurers to leave the market altogether whilst others have reduced their risk appetite and capacity.

Although it may appear that not all the above relate specifically to your property, insurers are looking at the performance of their whole portfolio of business and reacting accordingly.  The situation is unlikely to improve in the short term.