At a glance
- Insurer is gauging extra risk it is taking on around bank interest clauses, unlike other carriers, which is ultimately in the interest of all parties
- Zurich is seeing a three-fold increase in the number of requests for bank interest clauses over the first few months of 2014
- Banks are looking to pass on more risk to the insurance sector, which is posing challenges for both brokers and insurers
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Zurich has witnessed a sharp increase in the number of requests for bank interest clauses as banks continue to de-risk their real estate lending.
In the wake of the financial crisis, banks are looking to pass on more risk to the insurance sector through increased protection against shortfalls or vitiation of insurances covering the loan security.
Meanwhile, the ending of the decades-old agreement between the Association of British Insurers and the British Bankers’ Association has created further confusion with suggestions that the two are linked.
The agreement had set agreed parameters for interaction between the two industries when a finance agreement was in place for a property, but those parameters bear little or no resemblance to the extent of undertaking that is now being requested.
Colin Prince, Real Estate Deputy Underwriting Manager at Zurich, said the business was coping well with the additional demands, despite a three-fold increase in the number of requests for bank interest clauses over the first few months of 2014.
“Zurich is open to considering the requests from the banks and has put a lot of effort into coming up with an acceptable position,” he said. “We centralise all of these requests in order to ensure a consistent response.”
Getting it right
The completion process can take longer than in the past, particularly as the insurer must ask more questions in order to gauge the additional risk it is being asked to take on. However, getting things right is in the interests of all parties, including the insured themselves.
Zurich has seen instances where these requests are summarily agreed, effectively just ‘ticking boxes’ rather than fully addressing all of the issues regarding bank interest clauses, with each real estate transaction seemingly posing more specific challenges for insurers and brokers than ever before.
Getting it right means that we don’t just automatically sign off what is put in front of us. We will seek to make modifications to get to a point that is practical as well as being acceptable to all. In doing so, we do believe we are providing a degree of protection to our insured as well
Colin Prince, Real Estate Deputy Underwriting Manager at Zurich
Ironically, Zurich’s thorough approach can, at times, make it seem as though it’s more difficult to deal with versus other insurers.
“Getting it right means that we don’t just automatically sign off what is put in front of us,” said Colin. “We will seek to make modifications to get to a point that is practical as well as being acceptable to all. In doing so, we do believe we are providing a degree of protection to our insured as well.”
Without such due diligence, there is the potential for the insured to receive unpleasant surprises when they try to make a claim. For example, if there is a ‘first loss payee’ clause in the contract then the bank could potentially choose to prevent the proceeds of claims being passed on to the insured using them to offset the loan, thereby leaving the insured in breach of a lease and/or with a property that cannot be occupied and which they cannot afford to repair.
As well as the potential for completion to take longer, there is also the likelihood of increased premiums where the insurer is being asked to take on more risk. Part of the requests by banks are to include them as composite insured, which means two parties on a policy are covered as if they were insured separately and neither party can invalidate the policy in respect of the other.
“In effect, insurers will end up with a policy on their books for which they will always be liable for any loss, regardless of whether policy terms have been complied with or not,” said Colin. “These clauses do involve the insurer taking on a lot more risk and that needs to be reflected in the premiums we charge.”