Understanding Property Insurance and Commercial Insurance

The impact of the recession has contributed to pressures on risk management costs which have resulted in less than effective controls. This results in increased losses and larger claims. Escape of water (e.g. from burst pipes), according to statistics, accounts for nearly one in five claims made on landlords buildings insurance (and contents).

‘Deductibles’ and Excesses

This is the contribution to a claim that is made by the policyholder. Recently, this has not increased in line with inflation (except for escape of water incidentally, where the excess has increased to £250 (or up to even £1000 for cheap empty property insurance) leaving insurers to pay proportionately more.

Crime spike

Increased volume of unoccupied properties has really added to the risks faced by insurers. Arson and Theft (especially metals) continue to increase and is driving up costs and premiums to the customer – even on cheap unoccupied property insurance.

Fraud

Fraudulent claims increase costs to the ordinary policyholder – its that simple.

Modern methods of construction

Well-designed, fire-resistant properties will not require additional terms or premium. However, more combustible materials will incur cost such thatched, or those with composite panelling.

Impact of legislation

Legislation has a huge impact on the implications and cost of insurance. For example, changes to the deployment of fire services mean fires in buildings now often result in a total loss, increasing costs. New regulations mean that insurers must hold more capital to write business, and this increases premiums.

Risk management

This is hugely important to insurance companies and customers alike. Premiums can be reduced if effort and focus is spent on risk management.

Business interruption

Again often overlooked but of great significance. – As supply chains become more global, specialist machinery sourced nationally and internationally inflates pressure to the size of loss. The adequacy of Business Interruption sums insured is under pressure. Research indicates over 50% of policies are under insured which is astounding.

Profit and loss explained – Motor Fleet

Third party claims’ frequency added to increasing number of claimants per claim and fraud are key features in recent motor pricing. Recent market figures show the combined operating ratio (COR) for Motor Fleet was 106% – a terrible statistic but an appropriate breakdown for illustrative purposes is shown below. A COR of above 100% is therefore not sustainable and the insurance company in this example would be making an underwriting loss.

These figures are shown for illustrative purposes only and issued by Zurich in their report.

• Expenses £2.4m 13%
• Commission £2.3m 12%
• Total costs £20.1m 106%

Costs

• Claims’ costs Current year % of NEP – Attritional losses £14.4m 76% – Large and catastrophe losses £1m 5%
• Total claims £15.4m 81%
• 106%* Motor Fleet COR =UNDERWRITING L OSS *source Datamonitor

Latency – disease

There is often an extended period between a policy being underwritten by an insurer and a claim being made. A period of up to 40 years is not uncommon! Economic uncertainty makes predicting inflation difficult. There is a need to price for this going forward alongside future unknowns, such as emerging disease and illnesses. The impact of legislation and legal judgements; legal liability is ever-evolving and may impose additional liabilities, particularly if courts apply today’s standards retrospectively and impacts on all cheap public liability insurance.

Investment income

Low interest rates have had a negative impact on investment returns and investment income can no longer be relied upon to balance the account, driving more focus on appropriate pricing.