Construction All Risks
Despite one of the largest recorded years of natural catastrophe losses globally, there has been no significant upturn in construction premiums.
Although some carriers are showing signs of caution, in highly exposed sectors such as timber construction and tier 1 windstorm locations, generally the market is not showing any signs of hardening.
Any review of reinsurance costs during treaty renewals at the end of 2017 was undertaken in the context of the plethora of capacity entering the market over previous years and the ongoing low loss frequency. There is surplus reinsurance capacity and reserves. We have not yet seen any cost impact on construction companies themselves.
To date only one notable market has withdrawn from the market – they were predominantly focused on the UK CAR sector. Conversely other major UK carriers have sought to expand their appetite to encompass a larger geographical portfolio.
For many insurers, claims from the recent the 2017 natural catastrophe losses in US were well within modelled expectations, however it focused insurers’ minds of the potential volatility of accumulations in highly exposed areas.
Considering more specific risks the claims experience in relation to the US timber frame sector has resulted in a sharp increase in pricing and more restrictive conditions. In the UK, there continues to be water damage and fire losses. This is impacting the price and conditions offered by some insurers however continued insurer competition and their aggressive approach to growing market share has minimised the impact on clients. Where clients have experienced claims insurers generally are insisting on increased risk management and details which demonstrate the actions taken to mitigate risk.
The focus from many carriers has shifted to facilities for larger volumes of small to medium size projects, rather than large participations on the multi-billion projects. This is an attempt to maintain diversification within their portfolio and to reduce the administrative costs of underwriting.
Brexit and consideration of the potential impacts continue to be of concern, with very little certainty regarding what the final outcome will be. Brexit, rather than loss frequency, may ultimately be the biggest influence on London market capacity over the coming months.
During the past twelve months, Market appetite has remained largely unchanged over the past 12 months. Abundant capacity remains and insurers are competing aggressively for desired risks.
As a result of various factors, including uncertainty fuelled by the general election and Brexit, the level of construction projects being undertaken has decreased. As a result premiums remain competitive as underwriters seek to maintain their market share.
While competition continues for annual programmes, we have witnessed some specific areas of almost ‘hard’ market conditions. This is where claims have influenced the insurers’ thinking e.g. the Grenfell fire.
For international business, London markets are often unable to compete with local markets on pricing. The exception is in relation to complex risks with large limits though these are still predominately placed locally. Should market conditions begin to move in other regions of the global London terms and conditions may become increasingly competitive.
The professional indemnity (PI) market continues to pose significant challenges as the hardening market evolves. The total capacity being offered by insurers is being reduced, with many insurers no longer prepared to offer capacity on consecutive layers of an insurance programme structure, preferring instead to ventilate their capacity across layers.
This, coupled with the withdrawal of a number of key insurers from the PI market entirely, results in the need for new capacity to complete placements. The markets being approached to fill such gaps are currently being opportunistic in their approach; they are seeking significantly higher premiums than those being quoted by the lead insurers on the programme.
Cladding restrictions are now largely standard at the time of renewal. Clients are highly encouraged to ensure they have undertaken a thorough review of their projects and potential exposure prior to renewal of their insurance policy given the claims made nature of the coverage.
Higher limits of indemnity are being imposed by insurers where it is felt that the limit previously purchased is not sufficient for the size of risk. This is particularly prevalent where clients have reinstatement provisions under the policy (be they limited or unlimited in number). In order to protect such reinstatements insurers are looking to enforce limits appropriate to the risk.
The single project market is highly selective in its approach to new business. Many insurers will not consider long period policies unless they are familiar with the client and have an existing relationship.
The quality of underwriting information in all cases remains paramount and may increasingly impact the ability to obtain coverage and at what price, terms and conditions.
Claim costs continue to rise despite insurers’ target a loss ratio of between 65 and 70% for commercial fleets. Interestingly, according to ABI figures, 50% of commercial vehicle insurance claims relate to vehicle repair bills.
During 2017 costs continued to increase as a result of both the increasing cost of vehicle repairs(due to new technology and the devaluation of the UK pound increasing the cost of component parts) and the change in the Discount Rate. While electric cars are still relatively rare, though increasing, their repair costs are expected to continue to be high until the UK garage network catches up to the emerging technology.
The level of insurer competition within the motor fleet market for construction companies remains high, particularly for well risk managed fleets. In 2017 the rate for commercial fleets, comprising largely of light vans and cars, has generally remained stable where clients can demonstrate good risk management aligned to a favourable claims experience. The amended Discount Rate has adversely impacted fleets which have incurred large claims (over £250k).
While the UK government will undertake a further review of the Discount Rate (most parties are estimating a new positive level between 0 and 1%) we remain hopeful that the revised rate will allow insurers to reverse the recent reserve increases.
In 2016 insurers discovered 125,000 dishonest insurance claims (down 5% on 2015) valued at £1.3 billion. A reduction in the number of fraudulent claims as a result of ongoing focus from the Fraud Bureau and the Insurance Fraud Enforcement Department will improve the profitability of the motor underwriter’s book of business and industry loss ratios.
With respect to the high levels and cost of whiplash claims, the Civil Liability Bill looks to ban offers to settle claims without the support of medical evidence and introduce a new fixed tariff of compensation for whiplash injuries with a duration of up to two years. For clients the positive impacts on this is expect to result in for insurers will ensure that capacity remains in the market and rates are kept competitive.
Insurers generally are paying close attention to their portfolios though there is still capacity in the market. That said capacity remains available for project cargo, we do not expect that this will change in the short term.
The financial lines market, specifically Directors' and Officers' (D&O) liability, has shifted considerably in London since the turn of the year; the sector most effected is the construction industry.
This is due to a combination of factors, a general market hardening being the first. As mentioned in previous editions of Constructive Insight the D&O market was at the bottom of the cycle in terms of premium, this year leading primary carriers have stated that rate increase will be a priority in 2018.
Aligned with this are the two major construction incidents within the past 12 months, both very different in nature but both leading to a huge knock on effect in the financial lines construction market. The Grenfell tragedy and the liquidation of Carillion, both catastrophic in their own right. Each had a significant impact on the insurers involved and the resulting increases in premium, narrowing of cover, cutting of capacity, increasing deductibles and additional exclusions mean that the entire market felt the effects.
So in effect the financials lines market for construction related clients has felt a double hit, the market hardening combined with specific loss events. Although not all construction clients are effected by Carillion directly or deal with Carillion directly, it has certainly effected the insurers and their appetite for construction risks.
The D&O market still has considerable capacity in London, the appetite for non US listed companies is still strong and provides stiff competition among insurers. US exposed businesses continue to receive the greatest challenge, but private UK and European companies can still obtain competitive coverage terms, most noticeably on excess layers where insurers are further away from ’working losses’. However, even for clients such as these, insurers are seeking a 10% to 20% increase in rate.
The soft market conditions have been present for some time, so there was a certain amount of inevitability that it would turn, however it is now manifesting itself in increased premiums, deductibles and narrowing of coverage. Large losses are still being felt from US exposed risks, and the drive of litigation funding in Australia is as strong as ever, with the market there experiencing large securities losses and capacity issues.
It is of course unfair to punish one client for another’s indiscretions, but unfortunately insurers are trying to apply an industry wide approach. JLT continue to challenge this on a case by case basis to obtain the best deal available for our clients.