Market update – Construction
Construction was generally supported throughout 2020 when economic decisions were made by Australian Governments at all levels. Financial support to ensure the construction sector maintained momentum through COVID19 seems to have had the desired outcome.
We continue to see significant investment by the State and Federal Government on infrastructure projects. Recent announcements (including the 2021 Federal budget forecasted expenditure) on funding have confirmed the likelihood of large projects proceeding, and in some cases (particularly NSW) infrastructure spending is at record levels.
Most of these projects are now being placed on a principal arranged basis, with cover being placed on behalf of the contractor by the State authority. This has meant that often 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.
There are concerns about the cottage building industry due to the potential dip in house prices expected in the later part of 2021. There is no doubt that insolvencies will increase in the building industry over the coming 12 months. Historic evidence suggests claims increase significantly during downturns in the industry.
Despite the growth being experienced, there has been a significant contraction in capacity in material damage, advanced loss of profit (ALOP) and delay in start-up (DSU) coverage available in the local market. Notable withdrawals of Vero Insurance, AIG Insurance, AXAXL and several London syndicates has meant capacity is more difficult to find on some classes, particularly high rise residential and exposures in Northern Australia.
Underwriting agencies are also finding it more difficult to seek available capacity for their binders. Many of the largest underwriting agencies are now supported by the same insurer – QBE Insurance – meaning that options for clients are greatly reduced even in circumstances where there is an appearance of multiple quotes being obtained.
Insurers are also questioning their ability to mitigate risk exposure through quality risk selection, with many losses being outside the control of the contractor (particularly weather exposures). This has led to degradation in profitability and insurers are now putting effort into the scrutiny of claims, in particular the wording of the insurance contract and any terms and conditions attached. They will often avoid granting indemnity until such a review is completed, and in some cases decline cover where possible to avoid paying legitimate claims. Insurer selection is therefore critical, and you should seek advice from your broker in respect of insurers claims performance and philosophy when placing/renewing cover.
It is likely that Insureds who are transitioning from an insurer who has exited the market to another will experience premium increases. However, competition exists in the market that will continue to keep these increases moderate.
We would expect continued support for project placements over the medium term and minor increases in premiums on annual renewals particularly where adverse claims have been incurred over the past 5 years.
It is critical for your representative to have a deep understanding of the construction insurance market when negotiating on your behalf. As there are only a small number of potential insurers operating in the market and this means that once a market has taken a position on renewal it is difficult to alter that position.