January 2024 Market Update – Construction Material Damage

There are signs of improvement in the material damage market. Renewal rates have stabilised and some reductions have been achieved. Insurers continue to closely monitor and review risk management policies and procedures. Contractors with good claims experience are preferred by insurers and this is reflected in terms and conditions achieved for those clients.

Australian insurers, underwriting agencies and Lloyd’s of London continue to scrutinise underwriting information across the commercial, industrial, and residential sectors. Capital allocation remains conservative with insurers sharing project risk on annual and project specific placements. Insurers are much more likely to offer a smaller percentage capacity, which requires more negotiation to ensure a consistent placement is achieved.

There have been many recent personnel changes at insurers, which usually signals a change in underwriting methodology and a desire to increase market share. There continues to be a shortage of experienced underwriters in the market, leading to a demand for talent in the industry, which is likely to continue in the medium term.

Recent year rate increases, and benign weather conditions, have resulted in improved underwriting results and with it more interest in participation in the sector. If this trend continues through the forthcoming summer bushfire/storm season, we expect capacity issues experienced locally to ease and put downward pressure on pricing.

There is no doubt that the local insurance market remains more competitive than the overseas markets, particularly London.

Generally rates, terms and conditions are more favourable on material damage placements locally, with London only likely to be required to support local capacity on large, complex or high hazard projects.

There remain two distinct “market speeds” in the construction sector as insurers seek out profitable business and manage their portfolios through more comprehensive risk selection. Clients with significant losses (loss ratios of 80 per cent or more), poor market reputation or historic annual remarketing are viewed less favourably and are generally not seeing improved renewal outcomes. In contrast, improved renewal terms are being offered for clients who can demonstrate good claims experience, proactive risk management procedures and insurer loyalty.

There remains limited appetite for insureds with poor claims experiences, or those clients who have a history of changing insurers on a regular basis. Contractors should seek to nurture a relationship with their insurers (which should be reciprocated by carriers) where appropriate to demonstrate loyalty and seek improved renewal outcomes.

High rise residential construction

There has been a great deal of activity with significant ($100M+) new projects coming to market. Insurers continue to be cautious assessing these projects. Developer and contractor experience is one of the key underwriting considerations – ability to demonstrate experience on similar projects, project history, operating history, company structures and use of contractors/consultants are all assessed as part of insurer reviews.

iCert ratings are also considered in a positive light by some insurers – though obtaining such a rating only provides insurers with confidence in the financial stability of the contractor, and does not replace the need to demonstrate sound risk management.

Insurers are cautiously improving their attitude to this sector and showing a greater interest in these projects than in the past. Reforms and the scrutiny of the building commissioner of poor work practices in NSW has provided insurers with more confidence in project delivery.

We expect continued enforcement action by regulators (particularly in NSW) to continue quality improvement across the sector. Insurers have suggested that many current projects are seeing increases in overall construction costs and delays in completion. Contractors should ensure that they carefully consider their project timeline when approaching the market to avoid significant additional costs associated with policy extensions required due to delays in completion.

Insolvency risk

Insolvency continues to be an active consideration for insurers. Material damage insurers would rarely in the past perform financial due diligence on proposers. This has now become a standard procedural task during the underwriting process. Insurers are asking for details of project status around delays in completion and costs escalation.

Recent insolvencies will add to this pressure particularly in the cottage/residential project home market. However escalating construction costs and troublesome previous “fixed price contract” projects of the past 36 months are now largely complete, however we have seen a significant increase in the square metre rate on construction projects placed. Further details of this exposure is set out in our article here.

Infrastructure projects

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 the joint venture) 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.

High value single projects

As insurers seek to reduce their exposure to a single loss by reducing the capacity deployed, this has led 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 for water damage 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. Contractors are now expected to have a water management plan, and on larger projects physical water damage prevention measures to avoid the escape of water from new plumbing fixtures.

Insurers are cautiously waiting for the upcoming storm season after 18 months of relatively dry conditions and low weather-related claims activity.

Insurer selection is key for the medium-term strategy of construction firms – partnering with a stable insurer to retain coverage and to seek improved premium rates by demonstration of sound risk management and low claims as the market improves over the next 12 months.

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