The new risks facing construction professionals and how you can survive them
As the impacts of COVID 19 continue to unfold, it is clear we are facing extraordinary times in the construction industry. Both expected and unexpected challenges presented by the pandemic as well as insurance market conditions have combined to create the perfect storm.
In working with our clients over the past 12 months we have observed, firsthand, the unprecedented levels of risk contractors are exposed to during the ordinary course of running their business. Here, we explore these challenges, their implications on the future construction landscape and how contractors can best manage their exposures.
Understanding the Pre-pandemic environment
Prior to the pandemic, the insurance market was already adjusting their appetite to construction participants. After enjoying the lowest insurance pricing experienced in decades, insurers losses were mounting as a result of non compliant cladding concerns, design and construction professional indemnity claims (including significant class actions), defective building works and worker to worker losses. This resulted in a number of local and international insurers “walking away” from the construction market and no longer providing cover to this sector. At the same time the insurers who remained were increasing their pricing and taking a more careful approach to risk selection. As a result, contractors for the first time in 7-10 years, were forced to consider reducing cover and increasing excesses in order to keep pricing at bay. These tough conditions are likely to continue in the immediate short term.
How COVID-19 has impacted your bottom line
As COVID-19 emerged in 2020, the industry was unsure how the pandemic would affect business. As a key economic driver in this country, the government, for the most part, has tried to keep the construction industry open. At every government level, financial incentives have been introduced to stimulate renovation and the building of new housing stock. The additional disposable income enjoyed by most people (as a result of the various restrictions imposed throughout 2020) led to both increases in existing housing prices and a boom in new home sales and renovations. This was no doubt positive for the industry but it also created a massive supply issue – seeing raw materials, timber, tools (including motor vehicles) and prime cost items in short supply. Further compounding this issue is the fact that these materials are often imported from countries which went into a complete shutdown during the pandemic. As most of these countries are still unable to resume their normal level of exports, the material shortage is not expected to be resolved until mid 2022. This supply problem has had a dramatic impact on costs.
The current renovation and development boom has also seen specialist trades in higher demand, again driving pricing up and further squeezing margins. With these factors impacting bottom lines across the sector, it is no surprise that theft of materials from building sites has seen a significant rise during this time.
In NSW we have seen the first significant lockdown of the construction industry since the pandemic started. This “pause” will cause significant delays to projects, as trades will likely support the larger head contractors who provide ongoing work when rescheduling occurs, leaving smaller projects more exposed to delays than larger ones. This of course has knock on effects particularly where trade works are on the projects critical path.
Elevated risks for construction professionals
As the costs of doing business have no doubt increased, margins will also need to rise to cover these costs, but there is often a lag in this correction, particularly where the cause is so unexpected and the impacts felt so quickly. Having adequate and meaningful insurance becomes so much more critical during these times. When margins are high and profits are healthy, an uninsured loss can be managed with cash flow. When times are tough, insurance cover for unexpected losses becomes more critical to your business profitability. Under these circumstances, an insurance broker who understands the challenges in the industry and the specific needs of your business will be best equipped to tailor an insurance program to meet your needs.
Top 7 strategies to manage risk in the current landscape
- Does my policy provide & continue to provide cover should works cease for a prolonged period on site? Have I taken reasonable steps to protect my property from theft, loss or damage?
- What excess is most appropriate for my policy and how will amending the excess impact my premium? Taking a higher excess on policies where the likelihood of claims is lower is prudent.
- Consider your ongoing contractual obligations to hold insurance post contract, and new obligations arising from regulatory changes – particularly the Building Practitioners Act 2019.
- Ensure compliance with work health and safety and environmental obligations and consider whether the business should insure such exposures – the impact of a claim can easily eclipse $500,000.
- Cyber exposures are being passed on to contractors by principals – does your business have robust network security and does it need insurance cover in the event of a breach?
- How does my broker and the insurers I partner with perform on claims? This is often overlooked and should be one of the cornerstones of the decision process.
- How do I differentiate myself from my competitors from a risk perspective and how can this be articulated to the insurance market? Providing demonstrable evidence to insurers is key to achieving the best insurance outcomes.
It is also important to ensure that your broker has a strategy to approaching renewal on your behalf and isn’t simply undertaking a “transactional process” to renewal. You should understand and buy into this strategy and the broker should understand the deliverables required to meet your expectations – and you should have a measure by which to judge the outcomes.
To discuss your insurance needs with one of Bellrock’s experienced brokers, please contact us via the form below.