Why the Increase in Unoccupied Residential Properties Demands Advanced Risk Management Solutions

June 28, 2023

Why the Increase in Unoccupied Residential Properties Demands Advanced Risk Management Solutions

Following many years of a reasonably stable property market, the UK is now braced for some challenging times. The economic downturn has already seen the Bank of England base rate hit a 15-year high of 5%, with spiralling mortgage interest rates and many products being pulled from the market.

Property experts have been predicting a significant fall in average house prices, with forecasted figures of a 5% - 10% decrease by 2024. Falling house prices has many knock-on effects, including would-be sellers being reluctant to sell, while rising mortgage interest rates form a barrier for many potential buyers to get onto the property market.

In the first half of 2023, there has been growing evidence of a slowdown in the property market, with a declining trend in total UK residential property transactions. According to government statistics, the provisional seasonally adjusted estimate of UK residential property transactions was 25% lower in April 2023 compared to 12 months earlier.

These changes in the property market have many knock-on effects, including an increase in unoccupied properties. Recent research revealed that over 1 million homes in England have no residents, which presents new challenges from an insurance perspective.

An Opportunity to Capitalise on Emerging Trends

For brokers who want to capitalise on the latest trends, there is an urgent requirement to develop more knowledge about the higher risks that are associated with unoccupied properties, such as vandalism, theft and water leaks. Unoccupied property insurance is more complicated than standard home insurance and it is much more difficult to find underwriters for these risks, especially in a hard insurance market.

While this type of insurance may not seem as straightforward as other products in the market, this emerging trend of unoccupied properties unlocks new business opportunities. By moving quickly, brokers can attract new customers before competitors become aware of the increased demand for this type of product.

The following information provides some added context around the reasons for increasing numbers of unoccupied properties and the higher risks that brokers should be aware of.

Factors Affecting the Increased Number of Unoccupied Properties

The current economic climate is the main catalyst for the rise in unoccupied properties but other factors including tax changes, tightening of landlord regulations and several other factors are influencing the trend in the increasing number of unoccupied properties, as detailed below:

Higher Interest Rates Cause a Slowdown in Sales and Finding Tenants

The slowdown in the property market and extended length of time to sell, means that many properties remain unoccupied while waiting for the property to be sold. It is also taking longer to find tenants to move into buy-to-lets, as many landlords have increased monthly rent to counteract higher mortgage interest rates, subsequently pricing some people out of moving into a rental property.

Repossessed Properties

In tougher economic environments, there is also an increased number of repossessed properties, as homeowners struggle to manage increased mortgage interest rates. The complicated process of properties being repossessed can result in the property being unoccupied for an extended period until the property is finally sold.

There is also the significant concern of negative equity, as buyers become more cautious about buying a property that could soon fall in value. This could become a major financial concern, especially if the homeowner can no longer afford to pay their mortgage repayments.

Stricter Landlord Regulations

Stricter regulations have been introduced for landlords, which can also have an impact on unoccupied properties, as there are less properties being purchased due to wariness of the complexities and costs associated with the new regulations, such as fire safety requirements. Tax changes that are less favourable towards landlords has also resulted in greater caution around property investment.

Increase in Holiday Home Purchases

Another contributing factor to the empty property crisis is the number of properties that have been turned into holiday homes.

Between 2019 to 2022, council figures show that there was a 40% increase in holiday lets in England, with investors looking to capitalise on the large numbers of holidaymakers trying to book domestic holidays.

These properties experience the usual surge of bookings in peak holiday season, with large numbers of holiday lets then being unoccupied in non-peak holiday season.

Societal Changes

In recent years there has been an increase in remote working as a consequence of the pandemic, which has impacted the property market and people’s property priorities have changed. For example, the number of searches for properties in rural locations and properties that have a larger amount of space increased after experiencing lockdown.

This has resulted in some city properties being left vacant as people seek the uplift in life quality that comes with having more outdoor space to enjoy or being close to places of natural beauty. Remote working has opened up the opportunity for people to live and work from wherever they prefer.

Growing Awareness of the Increasing Risks

What we are seeing across the property insurance sector is a growing awareness of the higher risks involved with owning unoccupied properties. There has been an increase in demand for specialist insurance coverage to reduce the financial risks that unoccupied properties pose.

Residential unoccupied property products meet that demand, but the pace of change caused by economic volatility and regulatory updates make the jobs of the underwriters and brokers even more difficult. There has also been an increase in flooding, storm damage and subsidence over the past few years which underwriters and brokers need to consider.

The Impact of the Economic Downturn on Insurance Risk Management

Brokers and insurance companies face a constant battle to keep up with the latest trends and changes across the economic landscape. Being aware of emerging risks is paramount to providing the right coverage for clients, as well as being able to quickly apply the necessary premium adjustments and adapt the underwriting criteria and guidelines.

The increase in unoccupied properties is a major insurance risk, with vacant properties often being targeted for vandalism and burglaries. Vacant properties are also at a higher risk of water leak damage and other risks that gradually cause more damage when not identified immediately.

Water leaks or structural problems will usually be quickly identified by residents but if a property is empty for several months or longer, the property could be at risk of a much greater amount of damage over the time period, resulting in higher repair costs.

Challenges for Insurers and Brokers

For insurers, achieving the balance of pricing premiums competitively while adapting policy conditions to counteract the higher risks associated with unoccupied properties is becoming a bigger challenge.

Enhanced risk assessments are being introduced to help price premiums more accurately and to apply conditions that are specific to unoccupied properties, as well as identifying higher risks that are specific to the individual property. These risk assessments include property inspections and security measure requirements to mitigate potential losses.

Insurers are also looking at solutions such as providing property maintenance guidance for unoccupied properties and monitoring systems that will help to minimise damage or loss.

More properties are now in high flood-risk areas due to the impact of climate change and brokers must meet the needs of their clients by finding policies with adequate coverage. The Cumbria floods in 2009 caused by heavy rainfall revealed that many homeowners were unaware of the limitations of their insurance policies.

Numerous owners of flooded properties discovered that unoccupied properties had insurance cover exclusions. Brokers will want to avoid the repercussions of a similar situation and therefore need to be more diligent in ensuring there will be no nasty surprises for insurance policy owners.

For brokers, this means they will have to familiarise themselves more deeply with the policy details, as they will be required to provide clients with knowledgeable advice on more complex aspects of coverage, while also ensuring that the coverage is suitable for their clients.

A Way Forward: Specialised Unoccupied Residential Property Products Through Digital Platforms

Specialised unoccupied residential property cover provides a solution for all involved parties; the property owner, the insurer and the broker. However, before now, brokers would struggle to find suitable and cost-effective policies for clients with unoccupied properties.

Through innovative technology solutions such as digital insurance marketplaces, brokers and insurers are able to collaborate more effectively, without dealing with an increased level of workload.

The Benefits of Digital Solutions

Brokers are able to submit risk information directly to an engaged underwriter, eliminating the need to scour the market for underwriters who will be prepared to accept the risks.

Live messaging and other advanced tools provide seamless, instant communications, so if policies require negotiation, there is no waiting in telephone queues or being held up by delays in responding to emails.

A digitalised approach also enables brokers to have a greater awareness of the ever-changing risks that continue to arise, so that they can advise their clients accordingly and find the most suitable products.

Being able to offer a specialised unoccupied residential property product provides opportunities for brokers to attract new clients, as other brokers may not be able to offer this, or do not have access to the more competitively priced products.

In the current, ever-changing economic climate, the insurance sector faces many new challenges and leveraging the advanced capabilities of technology will be a crucial enabler in providing the right level of cover and quality of service to clients.

On Thursday 22 June 2023, the Bank of England increased interest rates by more than the anticipated hike. The property market is very volatile and property owners are even more concerned about protecting their assets.

The specific dynamics within unoccupied property and the heightened risks require the right insurance cover to provide the most suitable coverage and financial protection. Therefore, the broker’s role is more important than ever.

Underwriters need to run their practices profitably and in this uncertain economic environment, digital solutions hold the key to improved collaboration between the brokers, underwriters and policyholders, which will be beneficial to all parties.

Upsurance is the first insurance marketplace that leverages the most modern technology stack to effortlessly place and manage commercial insurance. Join the industry-leading players using Upsurance to transact insurance digitally today.

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