July 2023 Market Update – Construction Material Damage

Whilst there is no doubt issues facing the construction sector in terms of capacity, weather, supply chain and insolvency remain key factors for insurers, the overall market conditions are improving and appetite has started to return.

Australian insurers, underwriting agencies and Lloyd’s of London are scrutinising underwriting information particularly across the commercial, industrial, and residential sectors. Capital allocation remains conservative with insurers sharing project risk on annual and project specific placements.

There have also been recent personnel changes at the direct insurers, which usually signals a change in underwriting methodology and a desire to increase market share. Recent year on year rate increases have no doubt resulted in improved underwriting results and with it more interest in participation in the sector. If this trend continues, we should see capacity issues experienced locally ease somewhat and, in time, put downward pressure on pricing.

There remains 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 less than 80 per cent), 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.

High rise residential construction

Insurers continue to be cautious assessing these projects. Contractor experience on similar projects, project history, operating history, company structures and use of contractors/consultants are all considered. During the past 6 months insurers have shown greater interest on these projects. We would suggest some of that is resultant of the reforms and the scrutiny of the building commissioner of poor work practices. We expect continued enforcement action by regulators (particularly in NSW) to continue quality improvement across the sector. This will lead to greater participation from insurers.

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 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. 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 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.

High value single projects

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 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. Weather perils are also increasing claims costs to insurers because 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.

Insurer selection is key for the medium term strategy of construction firms – partnering with a stable insurer will reduce potential premium volatility as the market continues to improve over the next 12 months.

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