What does a ‘hard’ insurance market mean to us?

The hard market in insurance is undoubtedly leading to higher premiums and a tougher stance on claims. This is not a good time to be underinsured, as policyholders may suffer a shortfall in pay-out on an otherwise valid claim at a time they can least afford it.

Martyn Barrett BSc MRICS ACII FCILA FUEDI-ELAE, Director, Barrett Corp & Harrington

The majority of well- known insurers in the UK are multi-national, composite businesses with hugely diverse operations. Most offer cover for property, motor, health, liability, engineering etc as well as owning their own property portfolios. Putting it very simply, they make their living by balancing their assets and liabilities in the process delivering profits for shareholders, whilst paying claims.

Insurers are having a tough time, like most businesses and individuals, as we emerge into a post pandemic world. The insurance market was already under pressure pre Covid 19. Many factors were aligning over a period, all of which were squeezing margins and forcing the large composites to become ‘harder’ rather than face losses.

Insurance is often considered a grudge purchase for householders and businesses alike. This can, in part, be because the cost tends to rise and these days you don’t even get a piece of paper in return! Premiums are often a significant budget aspect but, statistically it is unlikely that it will ever give a return as most people don’t ever have to make a claim. BUT, if a big claim does come along, insurance could be the best investment ever made by any of us.

In short, we can’t live without the ‘peace of mind’ that a good insurance policy brings.

As illustrated below, through 2019 and onwards, factors aligned to create an insurance market where capacity was reduced, insurers became more ‘risk averse’ or, choosy in what they offered cover on. Supply began to be outstripped by demand. Insurers found that the cost of their own reinsurance was increasing, and this combined with many other factors led to premiums increasing, cost cutting in insurance companies and other action to ensure that insurers remained profitable whilst still meeting their commitments to policyholders.

Venn Diagram showing the causes that has resulted in a hard insurance market.

Along with a rise in almost all premiums, we also began to see our property insurance premiums increase. Behind the scenes brokers, were working hard to get the best deals from a market in which capacity was shrinking, particularly where the construction was deemed ‘riskier’ or non- standard. Reduction in capacity and resultant increases in premium, have been felt throughout.

There is another aspect of the hardening market that is emerging in insurer’s attitude to claims.

Contrary to the many urban myths, Insurers do pay claims. They contract with us to pay in the event of certain events happening- no ifs no buts- they pay. However, the whole principle of insurance is the benefit of the policy will be paid assuming you have paid the appropriate premium to reflect the risk that the insurer thought they were insuring. Here is not the place to discuss fair presentation of risk and the Insurance Act, but suffice to say that in most policies there is a direct correlation between the value declared at the time we take out the policy (and at subsequent renewals) and the premium paid. Should it be found at the time of claim that the rebuilding cost stated in the policy is inadequate then most policies have a contractual clause which allows the claim to be reduced in the same proportion that the true rebuild cost bears to the value stated in the policy. It’s called Average or proportionate settlement.

Insurers have always had the option to utilise these clauses, but historically, being keen to pay claims to maintain a good profile in a softer market, they have not enacted them. In the experience of BCH Director, Martyn Barrett, who began his Insurance career in loss adjusting, insurers seemed to accept a degree of what they called ‘claims leakage’. Underinsurance has always been out there, our own statistics at BCH after 15 years of trading still show staggeringly high levels

Underinsured properties

It may have taken the arrival of the hard market for insurers to start looking at the whole underinsurance issue more closely. BCH is now being called in regularly after a loss to check whether the insurance value was correct. This can only mean that the insurer is looking to use this to adjust the amount of claim, by applying Average or a proportionate settlement. That is very tough as the reduction in claim value will massively dwarf the amount of premium saved by not insuring for the correct value at the time the policy was taken out.

However, many insurers and brokers are also now part of a drive to educate policyholders on the importance of getting insurance values correct from the start so that problems do not occur at the time of claim. BCH is part of many of those initiatives and offers traditional RICS Compliant site-based reinstatement cost assessments (RCAs) and our market-leading, desk-based e-valuation service, Benchmark, which is increasingly being accepted by the major insurers and brokers as suitable for setting insurance values.

The hard market in insurance is undoubtedly leading to higher premiums and a tougher stance on claims. the growing volatility of construction costs throughout 2021 is likely to impact RCAs for some time, a topic worthy of its own article. This is not a good time to be underinsured, as policyholders may suffer a shortfall in pay-out on an otherwise valid claim at a time they can least afford it.

Remember that the insurance premium we all begrudgingly pay every year could end up the best investment we ever made.

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Beware the valuations of commercial buildings based on average prices

Why BCH assessments differ from a so called average prices.

We are often asked why our assessments may differ from a so-called ‘average prices’ found on search engines. At BCH we carry out fully compliant Reinstatement Cost Assessments.

We are often asked why our valuations for commercial buildings or RCAs may differ from so-called ‘average prices’ found on search engines, Building Cost Information Service (BCIS) or The Association of British Insurers (ABI) guides.

Valuations for commercial buildings

Commercial buildings can range from a converted farm building in use as a nursery to a multi-story office block.

Some of the more unusual we have been asked to assess include a historic mortuary and crisp factory (not that the two are related!) but more commonly we see light industrial units, shops, academic establishments, offices, and hotels.

At BCH we carry out fully compliant Reinstatement Cost Assessments in line with RICS guidelines*. This may mean making reference to BCIS data, but in the main, never relying on it.

Understanding the breadth of the dataset and delving into the analyses that sit behind it, is essential to using it in a meaningful way.

*RICS professional standards and guidance, UK, Reinstatement cost assessment of buildings, 3rd edition, February 2018

BCIS Average Price Data

Below are excerpts from the BCIS Average Price data as at June 2019 based on a UK mean location.

Table showing average rebuild costs.

In this paper we will consider 5 key factors to explain why valuations of commercial buildings shouldn’t be based on average prices

1. Sample Size

The first thing to note is the sample size. This means the number of buildings that the data is based upon. Using BCIS data (see table above) you will note that the sample numbers differ greatly. Although useful in building up a picture, as a result of the limited sample of data these average prices may not be at all representative of the building subject to the insurance assessment.


Commercial building on River Bank
BCIS Average Prices are calculated from a dataset of buildings since 1961.

2. When was the subject building constructed?

Since BCIS Average Prices are calculated from a dataset of buildings since 1961, they may be inappropriate for a property built before that date; or indeed more modern buildings if the samples do not include more recent projects. Materials used in the 19th century are often more expensive than the ‘go-to’ materials from today. Wood was used for windows as opposed to UPVC or powder-coated aluminium. If the subject property is in a Conservation Area or sensitive location and ‘like for like’ replacement would be appropriate, the use of traditional materials could result in a higher cost per m2 than the average price data allows.


Commercial warehouse buildings
Average prices do not make reference or differentiation between different buildings on a site which would have different functions.

3. Does the property include a number of different buildings?

Misuse of average prices does not allow you to make reference or differentiation between different buildings on a site which would have different functions. To take educational establishments as an example, did the school have specific sports facilities e.g. swimming pool, climbing wall and AstroTurf pitches? Were their specialist classrooms incorporating fixtures to teach food technology or soundproofed areas for music practice? Was there a small theatre or concert hall, a chapel? All of these features are found at educational establishments and would require a different approach in each case.


Commercial office buildings
A key difference in the end value will be dependent on the type of materials used.

4. Specification does make a difference to insurance valuations for commercial buildings

For offices, a key difference in the end value will be dependent on the type of materials used and services present. For example, air conditioning and lifts would add to the cost. A variance in façade material from simple brick, to glass curtain walling and the use of a concrete or steel frame, would also increase the rate applied.


Warehouse Interior
Huge variances can exist behind similar external appearances.

What is through the keyhole?

When looking at industrial units, huge variances can exist behind similar external appearances. The presence of mezzanine levels holding offices with appropriate heating and lighting will change an overall value significantly when you compare to a building that is largely used as a storage facility and not sub-divided in any way. The rates for warehousing in the table show that no indication is made to specific construction materials. These specifics would not be catered for if one was to rely on an assessment-driven by average prices.


To conclude, relying on average price data for commercial property may not always give a robust result upon which to base insurance coverage and doing so could result in a shortfall in payout at the time of a claim.
At BCH we assess each building on its individual characteristics taking into consideration its construction materials, size and specific site and location factors giving our clients confidence and peace of mind.

Is property you are involved with insuring fully covered?

If you are involved in the insurance of commercial property and would like to ensure accurate re-build values are given for building insurance cover, please feel free to call us today on 01455 293510 or contact via email, the BCH office team will be happy to answer your query.

You can also find out more about our Reinstatement Cost Assessments for commercial property here.

Download a PDF version of this BCH White Paper.

The valuation of buildings within prime Central London

Reconstruction costs in prime central London locations.

Reconstruction costs within Prime Central London far exceeds any published data.

As valuers of property all over the United Kingdom, our experience in the last 12 – 24 months is that reconstruction costs within Prime Central London, as defined by the postcodes below, far exceeds any published data.

This paper is intended to alert underwriters, brokers, managing agents and property owners to possible underinsurance that will be sitting within these locations.

The current position

The increase in market values in PCL is widely acknowledged with comments being used such as ‘the market’s gone crazy’, ‘prices are rocketing etc.’. There has been a lot of comment in the press with regard to the purchase of property within PCL being seen as a safe haven for foreign investors during the last few years. All brokers/ underwriters will recognise owners of property and homes in these locations fitting that profile.

Knight Frank has been tracking this since 1976 and although the trend in 2013 has been slower than some previous years, growth over the last 3 years has far outstripped that in other parts of the country.

Although it still remains the case that there is no correlation between market value and rebuild costs/the building sum insured, it stands to reason that a contractor working in a home that has just cost £15,000,000 to purchase – or indeed £1,000,000 – is not going to charge £50 to fix a dripping tap.

The cost of employing reputable contractors in these locations has increased. The market values have increased far beyond any indexing applied to an insurance policy and, while again we would not want to make any firm correlation between market and insurance value, one does need to dig a bit deeper as to what is going on on the ground.

The profile of the client has to be considered. The process required to create a perfect and flawless finish and the expected ‘scope creep’ of a design scheme, does take longer to achieve and inevitably contractors price this into their fees.

Scope creep and technology in buildings.

The technology found in such buildings is also increasing. It is not uncommon for a quarter of the sum insured to be taken up by lighting, heating, air conditioning, audio/visual installations etc. It is worth noting that in a standard office building, the inclusion of full air-conditioning (a must have in some quarters now) can add 20% to the rebuild cost.

We have assessed flats where clients have paid £8,000 per m² of floor area just for the internal fit out. There are also cases where a simple refurbishment of a PCL townhouse in a very sedate – one may even say ‘ordinary’ HNW scheme – has cost £7,000 per m². Internal fit outs of some commercial spaces – again with a fairly calm, simple scheme – have come in at £11,000 per m².

One BCH client reports spending £5,000,000 on a reception hall/ lobby scheme. Anecdotally there seems to be an element of “keeping up with the Joneses” with clients wanting to outspend their competitors or neighbours.

Carrying out a rebuild in a very tight/compact location and managing a project around restricted working practices and hours enforced by local authorities and planning bodies, also have a severe impact on the amount charged and the length projects take to complete. While some of the above may seem not to be relevant to insurance, there is an assumption that insurers have deep pockets and that claims are simply ‘expensive’ and the cost of the unexpected seems to have become the norm.

Re-valuation of buildings – the most prudent response.

Attention is drawn to the need to re-assess the base sum insured on a regular basis. Good practice advises that this is dealt with by way of a desktop update on an annual basis, with a full re-assessment undertaken in every third year. A full assessment also needs to be prepared in the event of substantial alterations being undertaken to the property.

Royal Institute of Chartered Surveyors
The above is the official guidance given on this matter by the RICS. However, very very few organisations carry out an annual review or even a three year review. Most owners and organisations leave it for at least five years. It is our opinion that for properties in PCL, the desktop update for those assessed during 2012 and those assessed on the basis of a site visit during 2010 or before should now be marked as an URGENT PRIORITY.

To conclude

Taking all this into consideration, BCH has revisited its view on costs within the PCL postcodes and is now adding significant contingency to reflect the increased costs compared to other parts of the UK. We would urge that desktop updates or full revisits be requested (depending on the date of the original assessment) to take into account what we see as a key market shift. This is essential to protect not only policyholders but also insurers; especially those offering any type of guaranteed rebuild cost where effectively the sum insured is unlimited.

Prime Central London postcodes include:

W1, W8, NW1, NW8, SW1, SW3, SW5 and SW7.

Also parts of WC1, EC1, EC2, EC3, EC4, E1, SE1, NW5, N1, SW6, W11, W14 and W6.