An increase in demand has coincided with a series of severe and attritional underwriting losses that have created a very interesting market dynamic as underwriters rethink their approach. Georgina Robinson and Andrew Clydesdale from our Construction team provide an overview of the opportunities, challenges arising, underwriting market's responses and how to achieve success for your clients.

There has been a general increase in the amount of CAPEX investment in construction projects globally. This in itself is positive news and is increasing the number of opportunities for construction underwriters and brokers. However, as mentioned this increase in demand has coincided with a series of severe and attritional underwriting losses that have created a very interesting market dynamic as underwriters rethink their approach. 

Tightening terms and increasing rates  

Builders Risk Insurance is becoming more expensive with tightening terms and conditions. This is especially the case for new construction methods, technologically advanced or high catastrophe peril exposures applying to both North American business and international business outside the US and Canada (includes non-US business and US insured’s with overseas construction). 

The construction insurance market has suffered from consistently poor loss experience globally for many years and a number of very large losses has exacerbated this more recently, both natural catastrophe and human error, for example;

  • A Large dam failure - Colombia in excess of USD1bn
  • Hurricanes Harvey, Irma and Maria
  • Coating issues with LNG projects - Australia with two particularly large losses potentially in excess of USD500m each.

Underwriters are being more selective and each risk is subject to much more robust scrutiny. Requirements for information have also increased substantially. 

Some sectors have become particularly challenging because of the very poor loss record and reinsurance treaty exclusions with underwriters consequently reducing their line sizes and appetite; examples are wood frame construction or heavy civil construction including tunnelling.   

Lloyd's target business, London capacity and continuing product differentiation

Lloyd’s is proving particularly strong in appetite for engineering projects in the range of USD100m and USD250m Estimated Contract Value (ECV). Although Lloyd’s markets will also consider civil works projects, heavy civils are less favoured. As in the example below gas processing plants tick all the boxes.

Despite the losses, there is still significant capacity available both within Lloyd’s and the wider London market. However, as with other construction underwriters, we are seeing increased rates and restrictions to the scope of cover they will now offer for some perils such as named windstorm and Californian earthquake (including fire following).

The London Market continues to differentiate itself by offering client specific manuscript wordings, which tailor the cover to the clients’ needs rather than relying on a ‘one size fits all’ domestic company wording. 

Information is King

Early engagement with your broker is essential to allow time to collate underwriting information and negotiate with underwriters.

Clients and insured’s can reduce the effect of the change in market on their insurance cover by seeking to provide as comprehensive information as possible about their risk as early as possible in the process.

The importance of lead underwriter selection and placing strategy

The London Market traditionally writes business on a subscription, (which means a quota share basis), especially for larger more complex risks. One insurer or syndicate provides a lead quote for a share of the risk and other insurers or syndicates choose whether or not to provide additional capacity. This subscription basis tends to enable the London Market to offer larger limits, especially for CAT perils. 

Obtaining a lead quote from a reputable carrier is not always a guarantee that an insurance placement can be completed for 100% of limit or order at those terms and a wider marketing exercise is necessary to structure a placement to the insured’s advantage.

Individual syndicates and companies are deploying less capacity on each risk and therefore an increased number of carriers are required to complete any placement. Terms are influenced to a greater extent than previously by assessing the appetite of supporting carriers to the placement.

The time it can take to obtain quotes is longer as more carriers need to be approached at this stage and more time is needed to complete an insurance placement once binding instructions have been received, as more carriers are required to participate.  

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Recent Successes

In recent months, we have placed a number of midstream oil and gas accounts for our clients including the rebuild of a plant suffering substantial damage after a major fire. We have also placed a policy for a very large chemical plant on the Gulf coast of Texas. 

Following the legalisation of Cannabis in many US states and Canada, either for medicinal or recreational use, we have placed a number of builders risk policies for greenhouses and production facilities where the domestic market is unable to offer terms.

We have also placed policies for North American clients who have interests internationally and need policies issuing in the country of their projects.

Helping you navigate this challenging market

Miller’s deep knowledge of the construction insurance market and understanding of the risks and challenges associated with different types of project allows us to provide assistance and guidance tailored to the specific needs of the insured. 

We will work in partnership with you to advise your client on what information is going to be important to underwriters and how to present your risk in the most positive way to achieve the best value cover with high quality insurance carriers.

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