Construction

Are soaring timber frame insurance costs burning through your margins?

Jason Baston 20 September 2023

In this article, our construction insurance specialist Jason Baston examines the critical importance of a resilient timber frame risk strategy and robust risk transfer solution to minimise insurance costs and maximise returns, when delivering successful developments.

Developers continue to be subjected to unprecedented inflationary pressures, both internally and throughout their external supply chain. The rising insurance cost for timber frame construction in the UK has compounded this increase; threatening to further erode much of the recognised value-gain and investment return from this modern method of construction.

Substantial losses suffered by timber frame insurers in North America and Europe have resulted in global insurance capacity limits - or even outright timber frame underwriting bans at a corporate level. This has substantially reduced the supply of timber frame insurance capacity in the UK market, at a time when conversely demand for timber frame insurance has significantly increased. Consequently, not only have premium rates increased, but a greater number of insurers are now required to share each development’s risk.

In response, many developers increasingly challenge their historical ‘blanket approach’ to risk and insurance, and instead now seek a dedicated timber frame risk strategy that delivers a cost-effective robust risk transfer solution.

Timber Frame Construction in the UK

Offsite prefabrication and timber frame structural building techniques have become widely applied and integrated in the UK. The rapid build process, improvements to quality control, reduced labour reliance, and lower carbon footprint are among many strategic advantages that have typically helped to reduce a development’s cost, build period, and increase investment returns.

Successful timber frame integration has also become critical to the continued success of developers. During the next decade, many of the UK’s largest developers have announced significant scaling up of timber frame builds, targeting both an increased proportion within their development portfolio and expansion of innovative techniques and technologies. Furthermore, many developers have made long-term financial commitments by developing in-house timber frame manufacturing facilities organically or through reverse-acquisition of suppliers.

As the pace of transformation in timber frame construction accelerates, so too does the awareness of associated timber frame risk factors and growth of historic data that can steer the course of future risk strategies.

Timber Frame Risk Factors and Strategy

Timber frame construction methodologies have their roots in traditional exposed frames, but now vary substantially across the globe. In the UK for example, furnished and insulated closed panel structures with integrated windows and doors have become especially popular in housing. Whilst the risk profile of each timber frame method will differ for each individual development, UK insurers regularly cite the following risk factors when assessing timber frame developments:

Fire resilience and site security: Timber combustibility creates a psychological barrier for insurers of timber frame when compared with more ‘traditional’ construction methods. Housing density and cladding choices will compound the risk when deemed combustible. The extent of hot works activity, arson prevention and overall site security is also a key consideration.
Water escape and ingress: Timber is naturally prone to damage and mould when subjected to moisture, increasing the potential for loss from water ingress or escape. As reported here water risk management has received significant scrutiny in recent years due to escalating losses.
Timber frame experience: The historic timber frame experience of the developer, key (sub)contractor(s) and the adequacy of associated loss data, can be a notable differentiator when understanding the risk of existing manufacture and erection techniques, and also the effectiveness and maturity of risk mitigation measures.
Series losses: Mass offsite prefabrication offers many quality control improvements and standardisation. However, any latent defect in manufacture may only become realised and patent following the construction and integration within large volumes of erected property.
Prototypical methodologies: New approaches lack the historic loss experience upon which insurers traditionally base their assessments. When such risks are transferred, insurers are exposed to much greater uncertainty in risk performance.
Contractual risk transfer: Availability of risk transfer and insurance, and the ability to subrogate and recover losses throughout the subcontract and supply chain, has significantly reduced in recent years - particularly for professional indemnity risk. Legal challenges such as Aspen Insurance v Adana Construction (2015) have also highlighted product liability exposures in offsite prefabrication for third-party manufacture (you can read more about this case here).
Supply chain capacity: Prefabrication is a unique and exact manufacturing approach. In the event of a major loss, there can remain very limited scope to scale up supply and obtain sufficient replacement timber frame units to fulfil a rapid reinstatement objective.
Logistics: Whether just-in-time manufacture or advance production and storage, multiple hand-offs create potential uncertainty about the vesting certification and ownership transition from manufactured stock to an insured construction component.

HOW MILLER CAN HELP

With the help of a specialist construction insurance broker, a resilient timber frame risk strategy can be prepared to allay prospective insurer concerns about a development’s risk factors. A strategy should demonstrate pro-active risk mitigation and risk management, and robust risk governance.

Presentation of a resilient timber frame risk strategy is now critical to both gaining sufficient insurer interest and achieving cover at the most cost-effective terms. Furthermore, the greater likelihood of additional information requests or questions all mean that developers must now commence their risk strategy preparation at their earliest opportunity and accommodate a much greater lead-time to achieving formal terms from prospective insurers.

Miller’s Construction team has extensive expertise in timber frame construction, associated risk strategies and optimising the insurance solution. We’re here to help.