Georgina Robinson, energy construction specialist at Miller, speaks with three leading underwriters to take the pulse of the market.
She brought together
- Caroline Hairsine, Head of Construction at Aviva,
- Ian Smith, Construction Class Underwriter at AXIS, and
- Kevin Lumiste, Specialty Insurance Senior Construction Underwriter at SCOR.
Let’s begin with an outlook question. Do you think the economic downturn will supress investment over the next few years, or drive more of it?
Caroline: Construction boosts economic growth, so it’s high on the political agenda of most nations. The problem is funding. Government finances are stretched, so it falls to private capital, but investors may be more cautious around the financial stability of projects.
Ian: Caroline is right, as usual. The recovery of economies will, in many cases, rely on infrastructure renewal and expansion. Covid-19 appears to have held back some energy projects, but many continue to progress, having secured appropriate funding. Capital still seems abundant.
Caroline: What I am concerned about is the workforce. As construction companies tighten their belts, they could look to rely on more cost effective agency workers, individuals with no company loyalty, and perhaps not the same level of training. They only come to site for specific tasks, and are therefore unfamiliar with the site specific health & safety and risk management procedures in place. We have seen this as the cause of a number of losses, through water damage and fire, and in the current climate I expect that to continue.
Kevin: The downturn may well drive new infrastructure investment in a bid to prop up weakened economies, particularly whilst the cost of borrowing is low. However, we’ll see sector impacts. Transport infrastructure growth in areas like passenger rail and airport expansions will certainly shift with the balance between global travel and home working. We can also expect reduced investment in oil and gas, although perhaps more from delays to planned projects rather than outright cancellations. Power investment will continue, although a shift away from carbon-based generation towards green generation methods is apparent.
If changing demand affects oil and gas sector investment, how will energy companies react to a prolonged period of $45 oil?
Kevin: New investment can still be expected, since most energy companies have already made dramatic efficiency improvements to enable profitable operation even at a low barrel price. For now, rather than large scale greenfield projects, we may see a higher volume of rehabilitation, expansion, and efficiency improvement projects – in particular de-bottlenecking and environmental improvement projects due to requirements for cleaner low-sulphur fuels.
Ian: I agree. Investment has and will continue to be made available to energy companies and projects, provided their fundamental finances and strategies remain strong, but as Kevin says, it may swing towards refurbishment and expansion of existing assets. But once economic buoyancy resumes, there’s scope for greenfield projects. It’s reasonable to presume that demand for oil will increase rapidly enough to foresee a marked and sustained increase in the oil price, such that energy projects that may currently appear uneconomic will offer greater returns.
Caroline: Yes, but there’s a clear focus by the oil majors on investing in renewables. Most have committed to huge projects over the next few years. And with increased pressure on governments to address climate change, these initiatives will be supported. In the UK we are seeing the switch of investment from gas-fired power plants to nuclear to meet energy demands and climate change mitigation commitments. From a construction perspective, investment in fossil fuels will continue because the tap can’t be turned off overnight, but over the next ten years I expect it to reduce.
But again, what concerns me more about the low oil price from a risk perspective is potential cost-cutting when it comes to plant maintenance. That’s not a construction issue, but I have already mentioned my workforce concerns in our area.
The construction insurance market has tightened considerably over the past year or so. Do you expect it to continue?
Caroline: It depends on what you mean by tightened. I don’t think capacity will reduce further. The closure of a number of books in 2018 focussed the minds of the rest to realise something had to change. As a result, we have seen more focus on rate and deductible increases, and tightened wordings. The market suffered some considerable losses over the years, and there’s still a way to go to ensure it is sustainable.
Ian: That’s right. There’s work still to do to make the market sustainable. Rates are fundamentally at a level that underwriters can accept, however there are challenges ahead to make appropriate adjustments for the linked considerations of catastrophe and global warming.
Kevin: I’ll just add that a sustainable market is required to withstand further adverse development of prior underwriting years when terms and conditions were weakened due to overcapacity, and to ensure that the panel of insurers on any given project is able to fulfil their commitments until its completion.
So all three of you see more tightening ahead. In what specific areas are further adjustments needed?
Ian: There are evidently and understandably differing views within the underwriting community on the scope of cover being provided, and whether there is appropriate sharing of risk – particularly with regards to policy extensions and ‘add on’ covers – between insurers, project owners, and their contractors. Rates alone may not ensure the sustainability demanded by management and shareholders.
Kevin: We have seen recent improvement on deductibles, but more focus is now required on clear, concise and well-understood policy wordings.
Caroline: Right, wordings do need a lot of work. We had reached a situation where underwriters were not in a position to make changes to a wording, even to ensure clarity, because brokers could easily place the risk with markets who wouldn’t make amendments putting everyone in a difficult position if there were to be a claim. It’s something I’ve seen numerous times. This is starting to improve, but there is still a lot of work needed.
Another area for improvement is underwriting information. It’s still lacking, and some brokers are still reluctant to ask for the information from their clients, which is disappointing as it will be available and good quality information helps underwriters understand the risk and exposure and define terms and conditions that reflect that.
Let’s turn to some specific causes of loss. Water damage has been a consistent problem for insurers. How are you tackling it?
Kevin: Some insurers and market organisations have produced valuable studies on water damage, and some action has been taken on improving deductibles, but that’s only a partial solution. An enhanced recognition of the risks by contractors and adoption of insurers’ suggestions are required to manage the exposure by balancing the risk between insured and insurer.
Caroline: We’ve been a driver of change for UK construction risks in this area for well over a year, with minimum expectations regarding deductibles, installation of auto shut-off devices, and implementation of water damage mitigation plans. If these are not met, we will walk away from the risk. To help support customers we try to engage at the earliest stage, and educate them on our requirements.
Ian: Water damage continues to pose problems. Alongside increasing deductibles, the construction market has worked on risk management measures to help mitigate this particular risk, with mixed views on its effectiveness. While the current Code of Practice is of theoretical benefit to the industry, water damage will not cause death nor catastrophic damage, which were drivers behind the fire Code of Practice 20 years ago. Unfortunately, it may be left to blunt instruments of deductible and full or partial exclusion to get the message across to project owners, managers and contractors.
Kevin: Perhaps a code of practice jointly developed by insurers and clients could be the way forward?
Caroline: That’s an idea! The issue isn’t just impacting the construction industry, but also the property market. By engaging early we can ensure that the construction exposure is reduced, and that once completed the insured is not unnecessarily penalised on their property placement.
Corrosion is another issue, and has been discussed for many years. Will we ever see consensus among underwriters on how to cover damage?
Caroline: I’m not sure… it took years to get the London Engineering Group (LEG) corrosion exclusions written and issued, and even then there wasn’t a consensus. One of the issues is who is ultimately responsible for the corrosion occurring, and are they or should they be an insured party on the policy. Should a loss from corrosion arising from faulty materials be totally picked up in the construction market, or should the construction insurers be able to subrogate against the manufacturers’ products liability policy? That opens a whole can of worms around insured parties and ‘site’ definitions…
Ian: There shouldn’t necessarily be consensus. The LEG’s suite of corrosion exclusions are intended to suit various project risks. Most underwriters seem to support the narrowest exclusions, and seek to impose the wider versions only where they’re deemed necessary or appropriate, depending upon the specific exposure.
Kevin: Yes, they’re beginning to achieve market recognition.
That begs the question, is London still as creative at finding solutions for clients, especially in the hard market?
Caroline: Absolutely! I’m all for finding alternative solutions for risks, particularly on the mid terms we’re seeing, but I think perhaps there is a fear to challenge the norm, and a preference to just go with the easy option. Some of this is time driven. It still amazes me, having worked in the construction industry before coming into insurance, how late in the day policies are placed, and with such minimal information.
Kevin: The London market has a high concentration of talented and experienced underwriters able to create sustainable solutions for complex risks, so – absolutely it is definitely still creative. Capacity and technical capability remains a core strength of London.
Ian: Can I be the dissenting voice? In the construction market, and perhaps more generally, I’m not sure I’m aligned with the concept that the London market is creative. If you show me an instance of creative underwriting, I’ll likely show you that it was an individual creative underwriter, and demonstrate that there are many more instances of the London market finding ways of not being creative. That maybe reflects what Caroline was saying about easy options.
2020 has seen a big move towards electronic trading. What are your thoughts on this?
Kevin: Electronic stamping has allowed us to operate more efficiently, and to dedicate more time to communication, which is ever-more important in these challenging times where face-to-face contact, discussion, and negotiation has not been possible.
Caroline: The ability to work from home has been great – it’s something I’d been striving for but not managed to achieve. We were prepared in that we had created electronic stamps a couple of weeks before the lockdown, so we had the capability to trade electronically. Along the way we found some tricks on Adobe to help speed up the process, but it is harder to review wordings, flip between pages, and scribble on them.
Ian: Yeah, electronic trading has only been beneficial for work from home purposes, and even then really for agreeing and processing endorsements. The concept that electronic trading is efficient, for construction insurance at least, is a fallacy that will have its limitations brought into even starker reality when – not if – the underwriters and placing brokers are forced to use it for the submission and quoting process.
Caroline: The electronic underwriting process is slower. In a face-to-face, a good broker can tell the story in five or ten minutes, and I will know if the risk is good, bad, or ugly. Currently the electronic approach is a generic page-long email with loads of attachments or a Dropbox link that takes ages to download, and normally includes irrelevant information. We have to spend a good hour wading through stuff before we can get to that judgement. Whilst I’m all for progress, I think for our line of business, where each placement is unique and often quite complex, there is still the need for some face-to-face broking.