January 2023 Market Update – Construction Material Damage

Capacity constraints, weather events, supply chain and insolvency concerns continue to impact pricing in the sector.

There is no doubt that insurers are starting to return to the sector. Underwriting agencies in particular are providing fresh capacity as many underwriting agencies seek to profit from the recent uplifts in rates.

However, the capacity being deployed by these new players is relatively small and does not provide a solution for larger contractors undertaking projects in excess of $20,000,000. There are signs that direct insurers are also looking to return to the sector, with large international firms hiring staff with a view to re-entering the market in due course. If this eventuates it should ease current capacity issues being experienced locally and could provide some pricing relief to insureds.

Insurers continue to seek out profitable business and are managing their portfolios through more comprehensive risk selection. Good claims experience and proactive risk management procedures will result in greater competition for business. Unfortunately, clients with claims are generally continuing to see less interest from the insurers who are still very risk averse in their underwriting practices. Clients with poor loss ratios less than 80 per cent are likely to continue to see moderate increases as insurers remediate their portfolios.

There is still limited appetite to insure construction works related to high rise residential apartments. There has been a great deal of publicity in respect of the build quality of high-rise apartments and insurers continue to be cautious when reviewing submissions in this sector. They take more time to review the experience of the contractor, with a preference for established businesses over start-up special purpose building companies undertaking construction. This is reflected in pricing and terms and conditions. Limited insurers will deploy capacity on large residential projects with many requiring multiple insurers to complete placement – this is in contrast with past experience, where one insurer would seek to provide 100 per cent capacity even on projects up to $150M in value.

Insolvency risk is also a consideration of insurers. Previously material damage insurers would not undertake any financial checks on potential insureds; however, it appears that this is now becoming part of some insurers underwriting processes. Insurers are asking for more detailed information on current project status – particularly on delays in completion or costs escalation. The recent collapses including now that of Clough will add to this pressure, that is set out in our August article “Construction insolvencies, rising inflation and impacts on insurance”.

It is expected that more construction business insolvencies will occur in the next 12 months which can have a potential impact on the contract works insurance marketplace in respect of losses. Should house prices fall as predicted in 2023, this could further impact the performance of contractors in the residential sector.

Major infrastructure projects are underway at both state and federal levels, with road projects involving tunnelling and major static infrastructure projects in the pipeline. The change in government has not yet led to any reduction in the investment in infrastructure spending at a federal level. There will continue to be challenges to place cover for these projects given the reduction in capacity in the market over the past 3 years. Most of these projects continue to be placed on a principal arranged basis, with cover being placed on behalf of the contractor by the State Authority. This has often meant that the market is pricing risk prior to knowing which contractor (or JV) has been awarded the contract. Insurers are therefore looking at the risks associated with the project in more detail given they are unable to fully underwrite the contractor undertaking the works. The complexity of infrastructure projects continues to increase, which is likely to impact pricing on large projects. Insurers are taking a more conservative approach in capacity deployment which will mean a greater number of insurers will be required to complete these project placements, and generally requires capacity from both local (Australian) and international (Asia and London) insurers to complete the placement.

As insurers seek to reduce their exposure to a single loss by reducing the capacity deployed, this has lead to additional negotiations being required on larger placements to ensure consistency in the placement across all insurers. It means more time is required to negotiate terms and conditions with the market and comprehensive, detailed information is required by insurers which in the past has either not been required or considered by insurers to be acceptable without being reviewed.

Water damage claims continue to rise in both frequency and value on insurers loss records. Such claims arise from bursting of plumbing causing damage to the works under contract. Insurers are asking for detailed risk management advice as part of submissions. Weather perils are also increasing claims costs to insurers as a result of the recent wet weather conditions on the east coast of Australia. Insurers are continuing to push for increased excesses for water related losses on construction projects to manage this exposure.

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