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How the Financial Crisis is affecting the UK Insurance Market

In a country whose favourite topics of conversation are the weather, sport and house prices, this summer has seen the national media enjoy a field day in what is normally a slow season for news.  While the Olympics provided a welcome ray of sunshine amidst a wet and windswept summer, the UK property market continues to hit further lows with each passing week a downward trend which seems to have no discernable end.

Before taking a look at the current state of the commercial property insurance sector it would be inappropriate not to delve a little further into the current developments in the widespread UK property market and reflect on the implications of global financial problems.

Two relatively small words have caused no end of problems in financial circles over the past year. Of course they are credit and crunch. There is no getting away from the crunch or its implications and, generally speaking, the UK property market has taken a big hit with house prices plummeting and liquidity in short supply. The impact of the Crunch has been far-reaching with no sector, including commercial property, going untouched by the fallout.

In its recently published second quarter commercial market survey, the Royal Institute of Surveyors (RICS) reported that tenant demand for commercial property had declined in Quarter 2 this year at its fastest pace since the surveys began in 1998 as did enquiries to occupy commercial premises. Demand and enquiries were weakest in the retail sector and fell back to a lesser degree in the industrial and office markets as the economic slowdown reduced business expansion.

Surveyors continued to report a rise in the amount of available floor space in Q2 across all sectors, although growth in availability did not accelerate any further, having hit a ten-year high in Q1 2008. The survey also revealed that confidence in the outlook for occupier demand and rents also reached their lowest levels in the history of the survey.

The property slowdown in the UK has also hit valuations in the commercial property sector hard and it seems that the floor of the market has yet to be reached. This has led to further downward pressure on rates as property insurance costs are directly linked to property values. Another complicating factor is the turmoil amongst property companies and managing agents. Properties, portfolios and property companies are being bought and sold as a result of market pressures and distress sales. This causes the links between the broker and the customer to be broken and the risk is churned back into a particularly price sensitive market.

More recently the government's decision to freeze stamp duty for properties up to 175,000 has been met with a tepid response from the industry. It also begs the question of why the commercial property sector has been ignored but this is perhaps a completely new debate in itself.

However, there may be a ray of light emanating from across the pond as the US Government has just staged 'the world's largest financial bail-out', according to a number of headlines, by nationalising stricken mortgage companies Fannie Mae and Freddie Mac. The US Treasury Department and Federal Housing Finance Agency has agreed to buy mortgage-backed securities from Fannie Mae and Freddie Mac. On top of this, the Treasury has also injected as much as $200bn USD of new capital plus credit lines for Fannie and Freddie.

Exactly what effect this will have on the markets remain to be seen, but analysts are already indicating this could well have a positive ripple effect on the UK market.

Confidence is everything in the property market and there is little doubt that it is currently in short supply. However, in a rare break from the shadows cast by the credit crunch the commercial property insurance sector appears to have been one of the more robust areas of the financial services market seeing relatively little upheaval due to a combination of continued low rates and decent levels of demand.

Consolidation is a well-worn word in financial services but is more evident than ever in the current climate as the Crunch continues to take a firm grip of the market. So much so that earlier in the year a report compiled by Ernst & Young, in partnership with the Chartered Insurance Institute (CII), entitled 'The future of commercial general insurance distribution' highlighted that almost 80% of respondents believed broker consolidation was driving a fundamental change in underwriting.

It seems inevitable that consolidation will form a distinct part of the future of the commercial property insurance market and this has been illustrated by the rise of the 'super broker' such as Towergate, Oval and Giles. It has even reached the extreme that, despite changes in the Capital Gains tax regime and the expected slow down in the sheer number of acquisition deals, established consolidators are now on the verge of buying other consolidators. This comes on the back of the announced plans by The Giles Group to acquire fellow 'super brokers' Oval and Jelf.

Previous acquisitions by these major players have either been funded by investment capital, which obviously demands a decent return, or by insurers protecting their distribution channels by buying brokerages - for example AXA's purchase of Layton Blackham & Stuart Alexander - which many observers feel will inevitably lead to a restriction of choice of supplier. Again this is another article in its own right.  However, the financial repercussions of such a deal does mean these consolidated entities have to hit the ground running and have an urgent need to deliver the required volumes of business and quickly. So much so that one MD of an independent brokerage I spoke to recently described the main players as 'scratching each others eyes out' to win business by discounting to the bone.

Of course the benefits for consumers are plain to see. This increasing push to acquire volume business across the whole of market will result in rates and premiums remaining low or even drifting further downwards. It may be another 18 months or more before there is a general market-wide hardening of rates which means consumers and property owners will continue to benefit from insurers releasing reserves and consolidators offering big customers a slice of the hefty commission income they can negotiate from insurers.

However, this cannot go on for ever. Insurers' balance sheets are hurting from the increased commissions demanded by the consolidator groups and broker networks. This comes on top of a constant release of reserves over the last three to four years, the impact of flooding in the UK over the past year, a destructive hurricane season in 2008 and diminishing income from investments worldwide.

With consolidation resulting in the bigger players in the market growing even fatter and looking to gain a wider share of the market it is up to independent brokers, such as Stride, to offer an alternative to the trend towards commercial property insurance being traded as a mere commodity. As well as seeking market leading rates and binding authorities from insurers to quote rates without referral, small and medium enterprises and property portfolio landlords are increasingly looking for a high quality service provided by experienced, knowledgeable staff.

There is no doubting the importance of the role of commercial insurance brokers. The ability to gather a full understanding of an individual business' needs remains of prime importance in what can be perceived as a complex sector of the market. Current market conditions dictate that as well as brokers continuing to keep their eye on the ball, in terms of firm's insurance requirements, they must also look closely at future distribution and try to evolve their own business models and offerings in order to meet the challenges faced by their clients and indeed their competitors in the market. To this end, it is important that brokers fully research their markets and in order to service continued demand they need to arm themselves with all the necessary tools available in order to provide their clients with good quality advice.

Embracing technology is a positive step that independent insurance brokers can take in order to move forward and provide increased competition within the marketplace. Many customers wish to use the web to generate and compare property insurance quotes as well as make payments for renewals. Again, at Stride Ltd we are investing heavily in online functionality and can already offer online quotations and have developed a full 'quote and buy' comparison service which will be launched by the end of the year. With the new system, clients can compare policies from a range of insurers, and take out cover and pay for renewals online therefore saving time on the phone and getting the best deal for a single property or a portfolio.

In a market where the only constant is change brokers must be aware of the need to diversify and evolve. Challenge remains the key word across the whole of the financial services sector and commercial property insurance is no different. Yet, for brokers viewing the opportunities in the sector there are positives to be found and even in these difficult times there remains hope that the challenges ahead remain surmountable.

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