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Pandemic pressures create opportunities in property transaction risk market

CLS Risk Solutions is seeking to expand the scope of its operations and is much better positioned than its rivals, the MGA’s managing director argues

The next 12 months is predicted to be a period of great change for the property transaction and investment risk insurance market in the UK and Europe. It is a period that will present considerable challenges, but also opportunities, for the small but growing number of insurers, managing general agents (MGAs) and brokers operating in the market.

The UK commercial property market can hardly be said to be booming at the moment. At the end of last year, the mood of the market was dominated by the challenges represented by Brexit. For much of this year, the market has been preoccupied by Covid-19, which is proving to be even more costly and challenging for the market and the broader economy. So much so, there is now the fear the UK will find itself in a deep recession in 2021 without having put either Covid or Brexit behind it.

But while the UK and European commercial property markets face huge uncertainty and unprecedented challenges, there is still liquidity in the market. This is very different from the global financial crisis of 2008/09, when there was no liquidity at all.

There is still a substantial volume of capital in the market looking for a home, according to Rob Best, managing director of CLS Risk Solutions, the specialist legal indemnity and transactional property risk MGA. “We are seeing some large transactions being done in the market. Quite a few of these deals are being driven by US and Asian investors who have the cash and who think now, nearly a year into the pandemic, is a good time to bargain hunt,” he says.

Investors are taking a long- term view, with 30- to 50-year time horizons not uncommon, Best says. “They see this as a bad moment but as just a moment. They believe out of the current turmoil will come opportunity and the sentiment that nobody has ended up poor by investing in London property is still very strong,” he adds.

Another difference to the last crisis, is the influx of public sector funds, particularly into the renewable energy sector in Europe. In May, the European Commission boosted the EU’s 2021 to 2027 budget by setting up a €750bn ($879.68bn) recovery fund, called Next Generation EU, to revive the European economy post-Covid.

This increased the size of the EU’s post-pandemic economic war chest to €1.85trn, a significant part of which is earmarked for investment in technologies seen as central to the transition to green energy. According to Best, the focus will be on renewables, energy storage, clean hydrogen, batteries, carbon capture and storage and sustainable energy infrastructure. The commission will also seek to boost the growth of the offshore renewable sector.

“We see renewables being very resilient to the Covid-induced economic downturn. There is a very strong push in Europe to stimulate the economy through investment in renewable energy, which is very positive for the green agenda,” Best says.

Expansion plans

Not surprisingly, CLS sees this as a good time to put into action existing plans to expand its operations both in the UK and in Europe. Over the past three years, it has been building a strategic presence in the French and German renewable energy insurance markets. Much of that time has been spent getting its products, its underwriting processes and data sets right for those markets.

CLS is now ready to start expanding across the whole of Europe. “We wanted to get our proposition right, which we have done. It is all about following the money. If the funding for renewables goes to Denmark then we need to be in Denmark,” Best says. The company is keeping a close eye on developments involving renewables in Europe. Two years ago, investor support for renewables temporarily withdrew from Germany because of the issues investors had with the government tariff on renewables.

The appointment at beginning of this year of Best as managing director of CLS is very much part of the deliberate, strategic expansion of the business. Best is a London market broker, with more than three decades of experience in the market, which includes leading the legal and environmental liability businesses of JLT, Gallagher and, most recently, Willis Towers Watson.

Competition

CLS is by no means the only player in the market looking to expand the scope of its activities. Its competitors, which include Axa XL, Zurich Insurance and fellow London market MGA Dual, have similar plans. But the company sees itself as better positioned in the market than most of its rivals. Established in 2010, the company is nearly as old as the property transaction risk insurance market in the UK, where, according to Best, CLS has pioneered many of the core products being used by the market today, including chancel permit challenge and rights of light insurance.

The company takes a great deal of pride in the role it has played in the development of the UK property transaction risk market – by far the most developed market in Europe – where it all started with the provision of insurance cover for title and legal indemnity- type risks. “These risks have been around for a very long time and are now quite well catered for,” he adds.

What CLS was able to do over the past 10 years, Best says, was to expand and develop new coverages from that pool of early legal indemnity products for property risks, an area in which the company has maintained its focus. For example, the company has always been the leader in the rights of light insurance market. “Now, you could look at rights of light as another legal indemnity- type of risk. But what we did was to pull that product out of the bucket of generalist legal indemnity covers, improved and refined it, then delivered it back to the market as its own bespoke, specialist product,” he says.

For Best, this is very much part of the constant evolution of the UK property transaction risk market. “As the challenges faced by our clients change, the products in the market evolve to respond to those changes,” he adds.

A great deal of the underwriting skill in the property transaction risk market is due diligence of the legal situation and the previous history of the property, according to Best. CLS has accumulated vast data sets, including proprietary underwriting data collected over the past decade. This data is then combined with open source data from land registries in the UK and Europe. “We have a dedicated technology platform, which brings together all of that data. There is a lot of complexity in property transactions, particular in terms of knowing who the ultimate owner of a property is, because some third parties are more litigious than others.”

Best says the company’s track record in the UK gives it an edge over its competitors in Europe. While legal indemnity and property laws on the continent are more diverse and different from those that prevail in the UK, there are similarities, including navigating a judicial review process in response to a challenge to planning permission. Mitigating the risk of such challenges is critical to renewable energy companies constructing solar or wind farms. “Work on such projects is effectively stopped until the challenge is reviewed,” Best says.

In the UK, such a challenge has to be made and reviewed within six weeks of notification. “While a six-week delay is still costly to the investors in the UK, in Europe, the period to challenge and to conduct a judicial review of planning permission can extend to seven years,” Best says. To mitigate the risk, CLS has developed a product that takes the uncertainty of the challenge away. “We take on the cost to investors of the delay in bringing the renewable energy source online and the cost of any legal indemnity to third parties associated with that delay.”

Capacity providers

Ergo UK, which has been CLS’s primary capacity partner for the last 10 years, signed a further three-year capacity agreement with the company in September this year. This provides CLS with the bulk of the capacity to pursue its expansion plans. Best sees the renewal of the agreement with Ergo, a subsidiary of Munich Re, as a testament to the strength of its business model and the demand for its increasing range of bespoke products in the market. CLS’s other capacity providers are AmTrust and Great Lakes Insurance, which is also part of the Munich Re group.

However, not all capacity providers have the risk appetite to underwrite in the property transaction risk market, where policy periods are often in perpetuity, the loss limits are high and where the market operates on the basis of a one-off premium payment, instead of a risk premium that is renewed annually. Indeed, being on risk indefinitely is an issue for syndicates in the Lloyd’s market. “Our policy periods are where Lloyd’s struggles most with this risk class and the reason why we tend to prefer non-Lloyd’s capacity,” Best says.

CLS’s environmental risk product, for example, provides cover for a 25-year period, one of the longest policy periods and one of the largest limits for property environmental risk cover in the market. “Our underwriters spend a lot of time calculating the probable maximum loss [PML] on each risk we cover, so a key consideration for us is to make sure the PML is manageable,” he says.

The overall portfolio risk is further mitigated by making sure there is a “healthy cross- collateralisation” between products. In addition, CLS will often have two capacity providers on the same risk where they either co-insure or, more often, provide layers of excess-of-loss cover.

Best insists CLS is very much open to new capacity providers with the necessary risk appetite. “If another carrier wanted to enter this market, I would rather hope it would consider talking to us about partnering with it. If we did bring in another capacity provider to support a specialty product or just to provide more capacity for our products, it would be treated fairly,” he says.

“The concern may be that new capacity could find itself being selected against because of our existing relationships with Ergo, AmTrust and Great Lakes, but we are able to manage this by operating with transparency and delivering growth to all our capacity providers.”

This article first featured in Insurance Day.

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Rob Best speaks to Insurance Day

Pandemic pressures create opportunities in property transaction risk market

CLS Risk Solutions is seeking to expand the scope of its operations and is much better positioned than its rivals, the MGA’s managing director argues

Expansion plans

Competition

Capacity providers

Offerings

Resources

About us

Rob Best speaks to Insurance Day

Pandemic pressures create opportunities in property transaction risk market

CLS Risk Solutions is seeking to expand the scope of its operations and is much better positioned than its rivals, the MGA’s managing director argues

Expansion plans

Competition

Capacity providers

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