Residential property - Out of crisis, opportunity

Many house builders face difficulties in today's economy. Big developers are cutting their losses, such as Vermont, which has shelved its £40m flagship Manchester develpoment, Foundry Wharf. However, opportunities exist for brokers in the new-homes market as the government drives for three million new domiciles by 2020.

With a huge range of policies on offer and last summer's floods driving consumer behaviour, managing agents are now turning to brokers.

Many brokers have a small number of managing agents on their books but, apart from in-house schemes, the lion's share of multi-tenancy residential property policies are procured through specialist brokers with bespoke property schemes. Simon Taylor, partner at broker Reich Insurance, stresses: "We can agree extended policies offering wider cover than is normally available because of the size of our property owners' insurance accounts; often, we can also obtain and offer price advantages."

Core covers for residential policies include building fabric, landlord's possessions, rent protection, alternative accommodation for tenants and property owner's liability. Specialist schemes offer comprehensive packages for larger developments - those valued typically at over £5m. These schemes are created individually and can include anything from engineering costs and employer's liability to directors' and officers' cover. Many of these packages can be tailored to suit the geography of a development, for example an option for the removal of fly-tipping in a neighbourhood where littering is a problem.

With so many covers available, management agents are looking to brokers to advise them. "We leave the calculations of the risks to our broker," says John Woolley, managing director at management agency PM-UK.

Market entry

In contrast to the abundance of insurers putting forward offerings, some brokers are holding back from the market, feeling that they lack expertise. Nevertheless, less experienced brokers need not panic as many insurers and wholesale brokers offer specialist schemes and advice tailored to the smaller broker. Albert Robinson, managing director at UK Facilities, believes that there are still plenty of opportunities open to smaller players: "Although some brokers may have specialist schemes, the same covers and rates are available to many brokers."

Recently, Norwich Union has employed Regional Property Owners Consultants, which is available for consultation with brokers to help them assess the risks involved with larger developments. "Property insurance for blocks of flats may seem complicated but it is really very simple," points out Mike Colmans, underwriting manager in the property owners' sector at Norwich Union. "You are insuring bricks and mortar with the people inside. So long as you have time to assess all the individual risks surrounding a development then it is really not that hard to ensure comprehensive cover."

If you choose to go it alone as a broker in this area then keeping an eye on the rules and regulations surrounding the property market is essential. Regulations for multiple-tenancy buildings change constantly and recent legislative updates have included the introduction of smoke-free areas, revised fire safety laws and air-conditioning inspection rules. Also, from 1 October, Energy Performance Certificates will become mandatory, forcing all managing agents to make their ratings public.

Surprisingly, many management agents do not see risk management around regulatory issues as a broker's responsibility. "Although insurers are able to offer the necessary inspection services through their engineering of risk management arms, property owners tend to look outside the insurance arena to source these services," notes Taylor.

The multi-tenancy buildings insurance market is not without difficulties and its competitive nature is causing problems. "At current pricing levels, some of the high commission deals are likely to be unsustainable and either rates need to increase or commissions reduce," notes Malcolm Smith, commercial underwriter at Groupama. The insurer is raising its rates on many of its property products by approximately 5% in order to counteract the problem but is meeting with resistance: "Major insurers that are trying to push up rate increases on existing business are often seen as quoting totally inadequate prices for new business."

An alternative to raising rates is to further adapt offerings to more tailored individual needs. PPS 25 local planning guidance with consultation with the Environmental Agency is now mandatory for new-builds, allowing insurance underwriters to consider flooding and other environmental risks in relation to individual properties. Using these environmental guidelines, some insurers are tailoring their premiums to individual properties and offering protection advice to areas deemed 'at risk'. Insurers can be more aligned now to the risks involved. "We are rewarding modern methods of construction," claims Colmans, whose firm takes this approach rather than penalising all customers.

Crunch time

The property market has been appearing punch-drunk in the last few months, with much of the industry having been hit badly by the credit crunch. The British Bankers Association reported a 67% drop on the number of mortgages approved in comparison to this time last year. Specialist residential property developers City Lofts has gone into liquidation, citing the number of unsold flats as the reason for its demise. Even large property developers have been hit, with UK giant Kier axing 60% of its residential construction staff in July.

"We have to be aware of the economic situation," notes Colmans. "There is the potential for fewer and fewer new homes to be built, which will not only raise rents due to high demand but will also leave a lot of unoccupied buildings as buyers fail to get finance. This may cause problems as owners of empty blocks need to ensure that they are protected from risks while they are empty."

Most of the big players in the market are now offering schemes aimed at blocks with empty apartments. During periods of non-occupancy, properties are often at higher risk from vandalism, squatting and arson and as such, insurers are seeing far greater take-up for the appropriate policy add-ons during the current economic downturn. However, according to Colmans, this is nothing new: "I have been in the market for over 30 years and there have been many peaks and troughs. The challenge is for us to reassure less experienced brokers that things will turn around and that there is still plenty of room for growth."

While some purvey doom and gloom, many brokers are doing well out of the turn in the property market; property owners looking for the better deal are defecting to the smaller management companies that do not have their own insurance arms. Woolley is upbeat about the future: "The small to medium-sized management agents have not been hit by the credit crunch. We are seeing more and more clients approach us as people look for value for money. We have more business than we can cope with."

AT-A-GLANCE - MANAGING COMPANIES

There is a vast number and wide range of residential estate management services. A management agent's remit can range from a committee of residents to a large professional service company that manages hundreds of estates worldwide. While the larger managing agents have their own insurance arms, the majority turn to brokers for their insurance requirements.

A resident is never required legally to use the choice of buildings insurance offered by their managing agent. John Woolley, managing director of residential management and administration service at PM-UK, says: "We always offer at least three quotes for insurance (from our broker) and then let the residents choose; 99% of the time they take our recommendation."

The standard excess is around £100, which increases to £1,000 or £2,000 for subsidence. If you want cover for malicious damage caused by tenants then you are looking at a figure of around £250. However, most management agents will not make a claim unless the damage exceeds the excess substantially. Woolley highlights: "Unless a significant amount of money is stood to be lost, we will pay for the damage ourselves. Renegotiation is the name of the game; instead of looking for immediate benefits, we like our broker to renegotiate with the insurer every year."

If a management company is registered with the Royal Institution of Chartered Surveyors then it can take around 20% of the insurance premium from insurers. However, not all agents like to take this path: "We are already paid by our client. We are successful as we remember that the insurance is not just for our benefit but is primarily for the residents," Woolley points out.