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Real Estate

Maintaining perspective in the face of conflicting demands

Natural disasters, war, supply bottlenecks, economic and trade sanctions, inflation and ESG: current, dramatic developments in world affairs, the effects of which are also being felt in the real-estate industry. The resulting challenges and emerging risks require particular attention in order to ensure that risk-transfer solutions remain feasible and stable in the longer term.

Market situation

Storm “Bernd” has bestowed historically high combined ratios upon the German insurance industry for 2021. Adequate risk-transfer solutions will, therefore, continue to be a challenge for the real-estate industry. Although many customers have gradually moved closer to insurers’ understanding of risk in recent years, current events are causing well-intentioned approaches to falter. Non-combustible insulation materials, for example, are often unavailable, while delivery times for sprinkler pumps are sometimes twelve months or longer. The price increases caused by supply bottlenecks, combined with high inflation, are leading to exploding budgets. Another consequence of this is that questions about the sense and feasibility of investments are now being raised very early on.

There is also an urgent need to review insurance values as well as adjust insurance amounts accordingly.

In addition, the sanction clauses usually included in insurance policies are, “all of a sudden”, having great potential for far-reaching consequences. This explains why a thorough review of insurance structures and the contractual partners in question is urgently advised.

Outlook

Insurers are continuing to use existing risk capacities restrictively. Capacities and prices are very much dependent on risk quality and customers’ understanding of risk. Transparency and binding communication between contracting parties remain essential. With an advisor offering industry expertise, customers will find an important navigator – a reliable partner in these challenging times. Insurers, by contrast, will have to face the circumstances that go hand in hand with the unavailability of products and materials that customers would like to use to improve their risk situation.

Conflicts may arise, especially where climate risks are increasing. There is also high demand for insurance protection against losses caused by natural hazards.

In addition, binding climate targets will have a lasting impact on the actions of owners, investors, financing banks and insurers.

Market trends

“Risk carriers are continuing to take a closer look”; is a general statement, but a statement that’s highly relevant in practice. One example is inflation, combined with a review of insured values and the correct determination of insurance amounts.

Customers’ risk of underinsurance is at odds with insurers’ risk of small insurance sums that do not allow them to generate risk-adequate premium income.

In some cases, competition is stimulated by the entry onto the market of new risk carriers offering customers alternative or supplementary insurance solutions.

However, genuinely new products are not to be expected. Rather, expertise and the correct application of existing insurance techniques are the factors set to play a significant role for both risk carriers and risk consultants. This will also be key for sustainably successful business models for customers from the real-estate industry.