Market update – Construction
The construction industry is not immune from the hardening insurance market. Insurers are looking to improve their loss ratios on all classes of insurance, including contract works and third party liability. It is probably the case that many insurers started this remediation on poorly performing accounts some time ago, which has meant a more steady approach rather than having to significantly increase rates in one renewal period. Excesses are generally starting to increase to reduce small attritional claims being made as evidence suggests Insureds are more likely to pursue minor losses during economic downturns than they are during boom times where losses are absorbed as a project cost.
Looking at the major classes of insurance purchased by contractors we observe the following.
We continue to see significant investment by the State and Federal Government which has driven many project placements in the past 24 months. Recent announcements on funding have confirmed the likelihood of large projects proceeding.
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 2020. The government stimulus announced in June to prop up this industry has received mixed feedback from financial markets. 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 this, the material damage and advanced loss of profit (ALOP) and delay in start-up (DSU) coverage available in the local market remains at record high levels, and capacity would suggest this is likely to continue. However, this capacity is more difficult to find on some classes, particularly high rise residential and exposures in Northern Australia. Many insurers have exited the market in this space which has resulted in more difficulty in obtaining competitive terms.
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.
Annual renewals are likely to experience minor premium increases as insurers try to increase the profitability of their portfolio. However, competition exists in the market that will continue to keep these increases moderate.
We would expect continued support for large 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.
Policyholders with benign claims have the benefit of steady rates. The Australian insurance market remains competitive for risk managed contractors.
Insurers now tend to request, and comprehensively review policyholders’ contract documents. In doing so, they are scrutinising detrimental contracting provisions, both up and down stream. Policyholders with poor contract administration processes and those who provide ‘no-fault’ indemnities or otherwise prejudice defence/recovery of claims, are being penalised. It appears that insurers are moving away from offering blanket contractual liability cover.
Trades, such as plumbers, remain hard to place in the current market. There has been increased frequency in water damage claims, particularly in high rise residential developments. Many of these claims are from failed crimping and or product defects.
Policyholders who have experienced losses will be “claims rated” and should expect premium / excess uplifts. There are less ‘alternative’ insurers who will quote on risks that they do not hold and who have experienced previous claims. It will be up to policyholders in this category to negotiate increased excess structures to mitigate against significant premium uplifts.
Lloyd’s of London syndicates are also exiting this class. So again, there is less competition and limited options to negotiate with an alternative insurer.
Design and construction (“D&C”) professional indemnity
There has been a significant shift in the professional indemnity market in Australia in the past six months. Strategic changes to risk appetite and capacity able to be deployed from several leading D&C PI markets earlier in 2018 has now filtered down to the broader D&C PI market with underwriters now requiring more time and information to consider providing terms. Insurers are also looking to tighten up areas of cover including non-conforming cladding materials, loss mitigation & rectification and express fitness for purpose.
Accounts with a clean claims experience are still seeing increases upwards of 15% with claims affected accounts experiencing greater increases.
Plant & Equipment
The class remains relatively steady; however, insurers are attempting to push through increases and are using claims experience discounts (CED) – where the client receives a rebate for the previous year if they have had good claims experience subject to renewal – as a retention tool. These increases are driven by registered motor vehicles claims costs continuing to increase as vehicles become more complex and costly to repair.
The Australian climate conditions were terrible throughout the 2018 to 2019 period in New South Wales and Queensland after being relatively stable in the past four years. This has resulted in significant one-off losses being experienced by insurers in respect of hail, flood or bushfire. Summer is the most volatile period in the Australian climate so insurers are likely to increase their pricing as a result of the summer season delivering severe weather events impacting loss records.
There is still a preference to place plant and equipment under a contract works policy where no road risk exists, as this is generally a more cost-effective way to cover plant in Australia. Insurers are becoming more resistant to this and are often removing this element from contract works policy – adding to the cost bourne by the Insured.
Long term clients will be rewarded for low claims frequency and severity, with claims experience being the main rating tool used by insurers to calculate premium. Organisation wide, entrenched risk management further assists in keeping costs minimised over time. Insurers claims records suggest that despite the increase in vehicle safety and driver aids that claims costs are not reducing as a result – and the average cost of repair per vehicle continues to rise.
Policyholders who have demonstrated loyalty to their insurers (see previous article here)will benefit in the current market conditions.
Ensure that your current adviser has:
- a deep understanding of the construction insurance marketplace;
- has a strategy to manage the market in the current conditions;
- considers the claims paying capability/history/philosophy of the insurers on your programme;
- has a long term view on the “structure” of your insurance placement;
- assist you to provide relevant, detailed underwriting information; and
- allows adequate time for negotiations should be rewarded with acceptable renewal outcomes.