The UK construction insurance market has undergone a significant change over the past 18 months. But what does this really mean and what you as an owner or contractor do to improve your chances of a successful insurance placement that meets your needs. Our construction expert, Georgina Robinson explains all.
Where do things stand today?
Years of surplus capacity with underwriters falling over themselves to insure annual programmes and project specific placements have turned into substantial premium increases, higher deductibles and reduced coverages being offered. The scale of the change is perhaps best illustrated by looking at premium rates for single project policies comprising both construction all risks (CAR) and third party liability (TPL) coverages. 18 months ago we were seeing premium rates of less than 0.1% applied to the contract value. This would result in a premium of £100,000 for a project valued at £100,000,000. As we stand at the start of 2021, this rate is more likely to be in the region of 0.3%, a 200% increase. A drastic increase in pricing for a product with narrowed breadth of coverage and increased excesses.
How did this situation come about?
The prolonged soft market, with its reducing rates and widening coverage, led to widespread competition. It was also a time where the twin scourges of fire and water damage continued to deliver significant claims against insurers’ books of business. While big fires always grab the headlines, it is the continuous attrition of water escape losses that have really hit home. These have been occurring regularly and indiscriminately to the extent that all insurers writing UK building projects have been impacted. Eventually, insurers had to give up on unprofitable business and this manifested itself in two ways.
Firstly, some insurers simply elected not to write construction business any more, withdrawing from the market and putting their books of business into “run-off”. In a recent market exercise, we identified approximately 30 insurers who continue to write UK construction business. This is a reduction of 25% to 30% on three years ago, when there were in excess of 40 players in the market.
Secondly, appetites among these 30 remaining insurers have changed considerably. Different insurers are reluctant to insure either buildings, civils or power and energy projects, depending on their past experience. This further narrows the field and those who will participate are being much more cautious about how much capacity to commit to each risk. Some insurers will restrict their participation to 10-20% of each project, meaning that a wider selection of insurers are required to complete a placement.
It's safe to say that the surfeit of supply over demand that sustained the soft market for so many years has disappeared. Roles have now reversed and this has been a big shock for anyone not old enough to remember the onset of the last hard market in 2001 (including me!).
How does this affect insureds in real terms?
Again, effects are felt at two key points during a project insurance lifecycle: during placement of new policies or amendment of existing policies.
Initial project placement
We have already described how the withdrawal of capacity has reduced the number of insurers that are participating in construction business. On complex and high value placements, brokers look for credible lead insurers to provide competing quotations. These leading markets are now more difficult to find given their reduced appetite for certain types, sizes, durations and locations of projects.
Once these lead terms are identified, the broker seeks the support of follow insurers until 100% of the capacity required has been secured. These follow insurers have become increasingly selective to the extent that placements are commonly completed on terms less favourable than the lead quotation, having been renegotiated by follow market insurers’ requirements.
The process of project placement in these hard market conditions is complex and we will address this in more detail in our next insight.
Amendments or extensions to existing projects
You may have been fortunate enough to have already placed your project risk in the insurance market prior to the recent hardening. This is indeed a good position to be in, as long as there are no material changes to the risk that requires underwriters’ agreement. If one or more of these insurers are in run-off, it may not be possible to amend the project insurances without replacing these insurers with alternatives. In this case, the shortage of capacity and change in appetite is exacerbated. Very few new insurers will want to replace a run off market to insure a period extension for an almost fully completed project; the works are at their most vulnerable and it would be almost impossible to charge enough premium to sustain any serious losses. I use the term “almost impossible” as recent extreme situations have come to our attention where a project that paid USD300,000 for its original period had to pay USD1,000,000 for a modest extension as a number of insurers had ceased writing construction business.
We have also heard of some insurers, when presented with an extension request, seeing this as an opportunity to re-underwrite the project. This might include the imposition of conditions that are commonplace today but were not when the project started, such as those more onerous on water damage.
What can I do to improve my chances of a successful insurance placement that meets my needs?
We have all had to accept the new hard market formula of reduced capacity = less competition = higher premiums + reduced coverage. However, there are things you can do to reduce the pain levels.
- Work with a specialist insurance broker that understands construction risks and the current marketplace of insurers.
- Give yourself and your broker enough time to see as many insurers as possible, as this will improve your chances of successfully finding enough to participate and complete the placement at reasonable terms.
- Be prepared to provide more detailed and in-depth information at the start of the process, as insurers may well ask for supplementary material. Whilst this may seem like an inconvenience, get into the discipline of providing this information as failure to do so is a major reason for insurers to decline.
- If possible, use insurers that have a strong track record of participating in construction business as these are more likely to remain in the market in the longer term and not require future replacement.
As always, myself and the Miller Construction team are here to help.