In our recent insight ‘Construction Insurance - How bleak is the market?’, we examined how the continuing reduction in construction underwriting capacity has increased the complexity of securing project insurance. Below we explain the key stages in placing a construction project insurance programme and suggest strategies for delivering improved results in hard market conditions.
1. Project Familiarisation and Underwriting Information
The process starts with understanding the project; this will include the nature of the works, their value, location and schedule programme, the parties involved and the principal techniques and materials being used. This part of the process also involves identification of the major risks and the mitigation measures employed. These aspects must all be clearly articulated to insurers and this requires information to satisfy the underwriters’ requirements.
Why provide this information at the outset as opposed to waiting for underwriters to ask for it?
The insured has an obligation under the Insurance Act 2015 to make a fair presentation of the risk to the insurer, and facts or other information pertinent to the underwriters’ decision-making process cannot be withheld. However, there are other practical reasons why every effort should be made to make full disclosure at the outset.
In order for the broker to properly design insurance solutions for the project, the risk information needs to be available. Having this information at the outset allows the broker and insured to proactively agree on a broking strategy as opposed to developing this reactively as information becomes available. It also allows the broker to review the suitability of insurance products and identify specific insurers who may or may not prefer certain risk characteristics.
How much information is required and how should it be presented?
It is important not to confuse the requirement to provide a fair presentation of the risk with overloading underwriters with information. We have seen this on occasion with the use of file hosting systems, and whilst not a problem per se, filling these with indiscriminate and badly indexed information is counterproductive. The fair presentation obligation requires that relevant facts and information must be brought to insurers’ attention, which cannot be achieved by information overload. This will inevitably create a negative impression of the risk in the mind of the underwriter.
The quality of the information is essential and should include whatever risk management measures and quality control procedures that have or will be introduced to reduce the possibility of loss or damage.
There are also certain ways in which the information can be presented that is easily understood and digested by insurers. The best example of this is the Delay in Start-Up (DSU) sum insured calculator prepared by the London Engineering Group (LEG). DSU insurance protects against income stream interruption (or additional project finance costs) in the event of delayed completion consequent upon physical damage to the project works. Presenting the revenue/profit/expense information in the insurers’ preferred format is an important factor in getting insurers to think about a project positively.
The best strategy is to engage early with your broker and discuss what insurers’ information requirements are likely to be. Satisfying these requirements can then be approached with a clear end-result in mind, with information being provided by pre-existing or bespoke documents as required. The broker should then incorporate this information into an underwriting presentation for insurers with an over-riding objective to present the project in its best light.
2. Market Selection
London is a subscription insurance market. By this we mean that it is rare for one insurer to underwrite a major project on its own. A panel of insurers all subscribe to a risk, each insuring for their own specified percentage. When looking to insure major projects, the broker will first identify a credible lead insurer, who has the competitive pricing, technical expertise, claims team and engineering resource capable to underwrite and service the project’s needs. Once this stage is complete, follow market insurers are identified who will support the lead insurer’s terms until the placement is fully subscribed.
In the final quarter of 2020 we carried out a London market survey to establish appetite for UK construction projects. Three years ago, while the insurance market was still in the soft phase of its cycle, there were approximately 45 insurers participating in this sector. At the end of 2020 this had dropped to 30 insurers. Of those 30 still participating, most had reduced the capacity they were individually prepared to commit to each project.
Having a clear marketing strategy has never been more important. Potential insurers must be divided into two pools; leaders and followers. Identifying credible lead insurers who can compete against each other to set terms for projects is critical at an early stage. However, where capacity is short, particularly for projects with a less attractive risk profile, this pool is diminished. This leads to less competition, meaning increased pricing and narrower coverage. The pool of follow market insurers has also diminished, resulting in higher chances of lead terms being unacceptable to follow insurers. This can result in the placement being secured at less favourable terms than those quoted by the lead insurer. We will tackle this situation further in a future insight when we consider BIPAR placements.
3. Broking and Securing Terms
On top of a reduction in available capacity, those insurers that continue to underwrite construction risks have either scaled back their teams or increased management oversight. This means less time and resource, and has led to a much more selective approach to risks with underwriters prioritising projects they want to (and think they can) win.
To increase the likelihood of underwriters choosing to participate in insuring your project, proactively providing the information outlined above, and responding to further information requests quickly can help. Beginning the insurance placement process early will also allow the broker to negotiate with insurers without time pressures becoming another factor to fight against.
4. Binding and Confirming Cover
Once quotations have been presented to the client, we seek formal instructions to incept cover with the preferred insurers. The complexity of this will depend upon the extent to which follow market support was secured during the quotation stage and time available to bind cover prior to the risk commencing.
The hard market has also resulted in insurers committing less capacity to each project, meaning more insurers are required to complete a placement. The more insurers you need, the more vulnerable your project can be to follow insurers seeking amendments to the existing lead terms.
Again, by starting the whole process with a sufficient lead time, your broker can overcome such complexities and secure the best terms the market has to offer. It is also important at this stage to ensure that all of the underwriters’ subjectivities have been resolved or else cover may be ineffective.
What can clients do to assist the process
As a bare minimum, clients can expect an increase in the time it takes to arrange their insurance. Positively managing today’s hard market will involve more forward thought and planning, and support from a good broker. Our four top tips are:
- Always engage with a specialist construction broker who understands both the project risks and the marketplace in which it is operating.
- Start early to allow enough time to complete the exercise and be prepared for underwriters’ additional information requests.
- Be prepared to sell your project. Engage with your broker - they will know what underwriters will want to see to get them interested in your project above all others.
- If you require DSU coverage, use the LEG spreadsheet. This is a great tool that highlights everything insurers will need to know about your DSU requirement.
As always, myself and the rest of Miller’s Construction team are here to help.