While availability and terms and conditions of Professional Indemnity (PI) insurance protection as well as Construction All Risks (CAR) cover are affected by greater frequency and severity of claims, there is still significant capacity in the London construction market if managed and brokered correctly. Even pandemic cover may be available soon for construction projects.
Professional Indemnity (PI)
After a prolonged ‘soft market’ going back as far as 2003, the last 24 months have seen a major shift in attitude from PI insurers. The Grenfell Tower fire led to a surge in claims associated with Aluminium Composite Material (ACM) and other combustible materials. This however was just the final straw, coming on the back of significantly greater frequency and severity of PI claims from the property and construction sectors since the 2008 financial crisis.
A report from Lloyd’s of London in 2018 revealed that 62% of syndicates recorded an aggregate loss on their non-US PI portfolio over the prior six years, making non-US PI their second-worst performing class of business. Lloyd’s responded by requiring loss-making syndicates to put forward business plans for 2019 that would return them to sustainable profitability.
For many syndicates this meant writing rate increases into their business plans of between 25% - 35% across their portfolios. For firms with worse than average claim records however, or those that no longer fall within insurers’ appetite, the results have often been far worse, with rate increases of 50% or more not uncommon.
In addition to premiums, insurers have had far greater focus on self-insured retention levels, which have often not kept pace with increasing revenues and claims experiences over the years. Policy coverage is also being reviewed, with insurers being far less willing to offer “any one claim” limits of indemnity, and applying restrictions or exclusions to cover, particularly in respect of ACM and other combustible materials, or fire safety issues generally.
With further insurer withdrawals within the last few months (China Re, Accapella, Vibe and Neon), and Lloyd’s continuing to put pressure on its members to produce profitable PI portfolios, the outlook for 2020 and beyond is rather gloomy, with further rate increases and capacity issues anticipated. Renewals in 2020 are looking like they may even be more challenging for many firms than in 2019. So, from a contractor perspective, starting the renewal process early and being with an experienced broker with a dedicated PI team will be key. For an Employer, with the exclusions and limits on the cover (“aggregate” basis of cover versus the more traditional “each and every claim” basis) that are now common (and likely to become even more common), de-risking via alternative methods of risk transfer should be evaluated.
Construction All Risks (CAR)
The last 24 months have also been a very turbulent time in the CAR insurance market following a number of large losses such as the Mandarin Oriental London Fire, Glasgow School of Arts Fire, Primark Belfast Fire (all 8 or 9 figure losses), numerous escape of water losses and further afield (but Insured in London) the Ituango Dam in Colombia (currently thought to be in the region of USD1.3bn loss). This is off the back of seventeen years of decreasing premiums and widening of cover. These factors combined have resulted in fourteen insurers withdrawing from writing Construction risks equating to a loss of capacity on any single project of over £1bn. This loss of capacity has had the knock-on effect on the remaining insurers which have been evaluating their portfolio and implementing corrective measures to ensure profitability for the medium to long term. These corrective measures have primarily been around four key areas:
Reduction in exposure – Insurers have reduced the percentage of any single risk they are willing to insure. On a £100m UK development, it is not un-common to need 5 or 6 insurers now as opposed to 24 months ago when you probably would have only needed 2 or 3. This means that it takes longer to place risk and there is a lot more scrutiny on the premium and cover being provided;
Cover - There is an increasing push back from Insurers on the cover they are providing. Insurance policies fall under two broad categories – broker drafted policies and insurer drafted policies. Broker policies are a lot wider than Insurer policies and do not contain any of the restrictions that can mean a client is left uninsured. In recent times there has been push back from insurers trying to get the cover closer to their insurer drafted policies, however, with negotiation these amendments can be kept to a minimum and limited to the “nice to have” perks (such as free extension in the Period if a project is delayed) rather than the cover critical items;
Excesses – The Excesses on the policy have started to increase and in particular the escape of water excess. Escape of water (from pipes and the like) is by far the biggest issue in the construction insurance market and insurers are now mandating an excess of at least £25,000 and more usually £50,000 or more whereas 18 months ago this would have been £5,000 or £10,000;
Premium – Insurers are looking at technical pricing of risk more than ever now and this has led to rates doubling in the last 24 months and in the current climate, it is likely that these rates will continue to increase.
Whilst this all paints a fairly bleak picture, the good news is that there is still significant capacity in the London Construction market if managed and brokered correctly. In-depth technical underwriting information must be provided and a proactive approach to risk management demonstrated. In our experience, information collation and detailed evaluation prior to negotiations with Insurers is key to ensuring the optimal outcome and is time well spent.
Finally, we could not finish without at least a reference to Coronavirus and our latest articles on the construction insurance considerations can be found here (opens a new window). It is probably not a surprise to hear that any new policies with revenue cover that are being placed/renewed will now have some sort of a COVID-19 or Infectious Disease exclusion. However, we are happy to advise that we are in discussion with a large Insurer and it is looking likely that within the next month or two, Pandemic Insurance for construction projects may become available to cover loss of revenue/profit and increased costs of working.
Having a dedicated and experienced specialist insurance broker is even more critical in the current challenging environment. Our fantastic team at Lockton Global Real Estate & Construction have been exceptional working from home over the last seven weeks and continue to service our clients with the same passion and dedication during these difficult times.
If you would like any further information on any items in this article or any other construction insurance or indemnity related matter, please contact:
David Lyle, Senior Vice President
T: +44 (0) 7769 243 416 | E: firstname.lastname@example.org (opens a new window)
Daniel Wood, Account Handler
T: +44 (0) 7342 076 582 | email@example.com (opens a new window)