One of the questions we’re most often asked here at Lockton is how exactly insurers go about working out what to charge for property insurance cover. In this article, we attempt to answer precisely that question.

Before they quote a premium, insurers will analyse a wide range of factors, some of which can have a major impact on the overall premium rate. Insurers’ premium ratings reflect their underwriters’ calculation of a property’s reinstatement cost (in other words, what it would cost to rebuild it), plus any associated costs they anticipate having to pay out for loss of rent.

• Fire

Fire is by far and away the costliest peril for insurers and is the main factor used to determine the premium rating.

Construction materials

Across all property asset classes, insurers now insist on understanding the infill material used in any composite panels or built-up cladding systems.

The insulation material mostly widely preferred by insurers is mineral wool, followed by polyisocyanurate (PIR) approved by the Loss Prevention Certification Board (LPCB) or FM Approvals. Where the majority of the materials used are rigid polyurethane (PUR), or expanded polystyrene (EPS), or where the insulation is unknown, insurers will typically quote based a worst-case scenario, resulting in significant additional premium cost. It can often be very challenging to place cover for residential buildings where there are combustible panels installed. Such properties generally require a bespoke solution.

It is important to note that, although particular types of insulation or panels may be permitted by local regulations, they may not always be considered suitable from an insurance perspective. This is because regulations are generally written from the point of view of protecting lives, rather than with a view to limiting damage to properties.

Insurers don’t yet have large-scale testing and performance data for new types of construction method such as cross-laminated timber (CLT). The absence of relevant experience or data points, combined with wood’s inherent combustibility, tends to mean that insurers take a broad-brush cautious approach when reviewing CLT-built properties. There is very limited cover currently available, and what there is tends to be very expensive.

When they review properties built using traditional construction methods, insurers will look for positive features like sprinkler systems and fire compartmentation that are designed to limit damage to the property.

Occupancy

Insurers generally regard industrial sites used for heavy manufacturing as the most challenging from a fire-risk perspective. This is because there are many different ways a fire can start in such properties. The next most concerning type of property in this context is warehouse sites. These often store significant amounts of materials like cardboard, paper, tyres, or foam goods like mattresses – all of which provide an ample fuel source that could allow any fire to get quickly out of control.

Properties used as recycling centres or for storing large amounts of chemicals or fireworks tend to result in a straight declinature from insurers.

The least concerning properties from an insurer’s perspective in terms of fire risk are offices and retail premises. Other asset classes such as residential, hotels, and student accommodation generally include cooking facilities which are seen as increasing the risk of fire. Fire-suppression systems and careful management can mitigate premium increases for such properties.

• Natural catastrophes

Insurers are increasingly concerned about climate change’s effect on the frequency and severity of natural catastrophes in the years ahead and will attempt to factor this into their pricing.

• Storms

The Association of British Insurers (ABI) estimates (opens a new window) that storm and flood damage claims in February 2022 amounted to almost £500 million. Meanwhile, reinsurance company Munich Re has calculated (opens a new window) that the flash floods across Germany, Belgium and surrounding areas in July 2021 resulted in damage costing €46 billion.

After facing major losses, insurers are now investing heavily in flood-mapping tools to help them shape their future underwriting strategy. Lockton often now sees insurers applying increased deductibles and/or additional premiums and limiting cover for properties in what they see as high-risk areas.

Almost 26% of the land area of the Netherlands lies below sea level, which significantly increases the risk of flooding for properties here. Although the country has 17,500 km of primary and secondary defences, cover remains in short supply, and premium costs are very high, reflecting the huge impact a major flood event could have.

There are measures you can take to improve how the risks associated with a particular property appear from an insurer’s perspective. These include installing flood gates or otherwise adapting the property to make it more resilient against flooding. However, the most successful risk mitigation schemes, from an insurer’s perspective, are large-scale infrastructure projects like the Thames Barrier.

• Earthquake

Among the highest-risk zones in Europe are Italy’s mountainous spine, western coastal areas of Greece, and parts of Turkey and the Balkans.

Even when seismic considerations have been allowed for in their construction, properties in regions identified by insurers’ risk-mapping or catastrophe-modelling systems as high-risk are likely to have earthquake cover limited indiscriminately or excluded altogether.

Where they are willing to provide cover in high-risk areas, insurers will normally apply an additional premium that could effectively double the price quoted compared with similar properties outside these high-risk areas.

• Other factors

The risks of fire and natural catastrophe generally have the biggest impact on premiums. However, a variety of other factors also have a bearing on pricing.

Claims history

Where a property has a history of multiple claims resulting from a particular peril (for example, escape of water, which is very prevalent in residential properties) this will raise concerns for insurers, as it could suggest inherent problems with a property.

Insurers will review the claims histories of property portfolios by calculating the net loss ratio. This is the proportion of the total claims paid and reserved against the total premium paid, excluding commission, taxes etc. A net loss ratio below 40% indicates an account that is performing excellently and where there is a high standard of risk management. Such low net loss ratios are a very positive sign for insurers.

Vacant properties

Vacant sites typically attract higher premium ratings, and insurers are likely to impose security conditions and potentially restrict cover. Underwriters will be concerned about an increased risk of arson, theft or malicious damage where properties are left vacant. Insurers generally look for 24/7 security on the largest sites to mitigate these risks.

Want to know more?

To find out more about how property insurance premiums are calculated and what can be done to keep your costs down, contact a member of our team and we will be more than happy to help.