JUNO INVESTING ©

The Property Insurance Roller Coaster

JUNO INVESTING ©
 The Property Insurance Roller Coaster

 

The editorial below reflects the views of the editorial contributor only and content may be out of date. This article is sourced from a previous JUNO issue. JUNO’s content comes from sources that it considers accurate, but we do not guarantee that the content is accurate. Charts are visually indicative only. JUNO does not contain financial advice as defined by the Financial Advisers Act 2008. Consult a suitably qualified financial adviser before making investment decisions.

WINTER 2015

By Martyn Sinclair, Associate Director, Marsh Limited

To many New Zealanders the Canterbury earthquakes will be a raw memory, and for a significant number they remain a live issue four years on. Much more recently we have been saddened by the tragedy of the earthquake that struck Nepal just a few weeks ago.

The world witnessed other natural disasters during 2011; the earthquake in Japan saw a tsunami ravage coastal areas and the destruction of the Fukushima nuclear power plant, severe flooding occurred in Thailand and Australia, and windstorm damage in the USA caused devastation. Globally the financial impact of these events has been estimated at US$370 billion, of which approximately one-third was insured.

In the immediate wake of these catastrophes, property insurers in New Zealand reacted in a number of ways. This included withdrawing from underwriting altogether, limiting the capital they were prepared to commit to earthquake-exposed risk, narrowing the extent of cover under policies and imposing significantly increased policy deductibles. The most obvious change in response to the catastrophes was an immediate and sharp uplift in premiums.

Fast-forward to 2015 and the international insurance markets are attracting more and more investment capital, with fund managers eyeing strong returns in the absence of major insured catastrophes. In turn, this is reducing costs for insurance companies operating in New Zealand. 

When combined with a desire for growth and market share, we see increased competitive behaviour within the New Zealand insurance market. This is demonstrated by improved coverage, lower deductibles and markedly more competitive premium rates either as incentives for insurance buyers to remain with their current insurer, or as a lure to move to a new insurer. 

While each insurance buyer’s experience will differ based on their individual risk profile, all buyers should be experiencing more favourable conditions.

The ups and downs of the insurance market conditions discussed above, combined with the annual renegotiation that each buyer must enter into with its insurers, are at odds with the decisions most investors make on financing their assets. Let’s not forget – insurance is simply a source of capital that becomes accessible following an insured event. 

So how do you seize the immediate advantages on offer from the insurance market and position your property portfolio to better influence insurance outcomes in the future? 

We recommend property investors to consider two areas – pre-investment due diligence and post-investment implementation.

Pre-investment due diligence

Anyone considering investing in a new asset or portfolio of properties should undertake appropriate due diligence. 

The quality of building stock within New Zealand continues to improve as property owners and managers work through earthquake-strengthening programmes. However, earthquake-prone buildings (those classified as less than 33 per cent of New Building Standard) and earthquake-risk buildings (between 34 per cent and 66 per cent) continue to be challenging when sourcing stand-alone property (and loss of rental income) insurance. 

If these buildings are part of an investment portfolio with a good geographical spread, the insurance market can be more forgiving in regards to the terms and conditions available, than if considering a single building in a high-risk catastrophe area.

The occupation of any current or future tenants and how an insurer might view their business activities is also critical. For example, common sense will tell you how a building that is only tenanted by professional-services firms will be risk-assessed compared to a building with a fast-food outlet with a deep fat fryer on the ground floor. 

Getting a property risk assessment done before you invest is a relatively small upfront cost. But it will identify any potential hazards and assess the protective measures already in place should problems arise later.

These assessments can also identify risk improvement opportunities that may be easy to apply through a simple process change (such as improved housekeeping and removal of waste packaging from the premises), or enhanced fire protection systems (such as sprinklers), where additional capital expenditure may be necessary.

Post-investment implementation

The same risk assessment can be carried out on your existing assets, which can be used to provide insurers with detailed risk information that is fundamental to achieving the most competitive pricing and the broadest available policy coverage. 

High-quality risk information also helps minimise the impact from unfavourable insurance market conditions, such as those experienced by property owners in 2011.

In times when insurance markets offer premium reductions, it is sensible to reinvest some of those cost savings in risk management. This will ensure you are well positioned to distinguish your risk profile from everyone else queuing up to ride the insurance roller coaster.

 

Quick Glance

International insurance markets are now attracting more investment capital, with fund managers eyeing strong returns in the absence of major-insured catastrophes. In turn, this is reducing costs for insurance companies operating in New Zealand. 

There is increased competitive behaviour within the New Zealand insurance market, demonstrated by improved coverage, lower deductibles and more competitive premiums.

It is recommended that property investors consider pre-investment due diligence on new property assets and post-investment implementation on an existing portfolio. These will enable investors to take advantage of the current insurance market and to better influence insurance outcomes in the future.

Pre-investment due diligence:

Getting a property risk assessment done before you invest is a relatively small upfront cost. But it will identify any potential hazards and assess the protective measures already in place should problems arise later.

Post-investment implementation:

Risk assessment can be carried out on existing assets, which can be used to provide insurers with detailed risk information.  This is fundamental in achieving the most competitive pricing and the broadest available policy coverage. 

In times when insurance markets offer premium reductions, it is sensible to reinvest some of those cost savings in risk management.

 

 

DEFINITIONS

Capital: the amount an insurer is prepared to commit to any one insured property or portfolio of properties.

Cover: the level of risk or extent of liability that a policyholder insures their asset against. For property this can be expressed as a monetary sum assured.

Due diligence: research you undertake on an investment before you buy it.

Market share: proportion of the insurance market controlled by an insurance company.

Policy deductibles: items that an investor must pay out of their own pocket before an insurer will pay any expenses.

Premium: the amount it costs to insure an asset.

Risk profile: the hazards that an individual or enterprise potentially faces.

Risk tolerance: the level of risk an individual investor is comfortable with.

Underwriter: a company that issues insurance policies.