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Market update - Contractors All Risks Insurance

Over the last couple of years, the construction insurance market has undergone drastic change, transitioning firmly out of a very soft market. The previous 15 years of falling insurance premiums and broadening coverage has now made way for restricted and regularly challenged policy coverage, and increased rates and excesses, as construction insurance markets seek to mitigate their exposure.

Here we look at why the market is transitioning, the implications for Policyholders, areas of concern when obtaining Contractors All Risks (CAR) insurance, and how you can navigate this challenging market.

A deteriorating and challenging environment

The current market conditions follow a long period of low interest rates, which made insurance a viable investment class for institutional investors seeking financial returns. An influx of capacity into the market followed and this created increased competition, which in turn drove down rates and widened the cover insurers were willing to offer in order to win and retain business. So what’s changed?

Project failures

A key driver for the change in market conditions were large claims on high-profile engineering, oil and gas, power, and hydroelectric projects. These served to highlight and expose the diminishing premium reserves held by underwriters, as a result of the prolonged soft market cycle. There’s been a significant number of these major claims since 2018, and a hydroelectric project looks set to be the largest individual CAR claim of all time.

Natural disasters

The Harvey, Irma, and Maria (HIM) hurricanes in the US also contributed to the transitioning of the market, incurring a combined total cost of around US$125 billion. The UK has also had its fair share of extreme weather with storms Brendan and Dennis.

Fires

Several high-profile major fire losses in the UK have impacted the market such as the Grenfell fire tragedy, the London Mandarin Oriental Hotel, and the Glasgow School of Art. This is in addition to the increase in water damage claims, which have been very damaging to insurers' balance sheets.

These losses have attracted a greater focus from both Lloyd’s insurers on underwriting profitability and the overall viability of CAR insurance. Therefore a large number of CAR underwriting teams have ceased writing business. Others are undertaking a very selective underwriting approach, or have undertaken internal reviews and overhauled their underwriting criteria. This has caused about £600 million of capacity to be withdrawn from the market. New capacity has been slow to establish itself as reinsurance capacity is increasingly sought from a reducing pool, with Brexit causing further uncertainty around long-term underwriting considerations for many insurers.

COVID-19 impact on the market

While the full extent of COVID-19 exposures is not yet known, the pandemic has accelerated the market’s transition. And it’s been suggested that conditions will remain in transition into 2021, as the global market assesses the impact on its construction portfolio. We are seeing more insurer requests to impose COVID-19/pandemic exclusions, often regardless of whether a real exposure is expected.

Policyholder implications

As a result of the transitioning market conditions, most of the market is amending and reducing cover and benefits that were once the norm for many years. Each risk is considered on its own merits, but some of the standard changes are as follows:

Policy amendments

Period extensions

Existing project policies are seeing issues related to period extensions and reinstatement to delay in start-up (DSU) covers. And negotiations are further complicated by the number of markets that are now in runoff. Previously, up to 90 days would be automatically included for no additional premium, and further extensions at no higher than pro-rata, but this is no longer the case. Period extensions may now be limited to pro-rata for a short period, then at terms to be agreed. This reduces cost certainty if large extensions are required and, in some cases, extensions may not be secured at all.

Excesses

There are increased excesses across most areas, but particularly losses arising from water damage and defects in design, workmanship, and materials.

  • Coverage Amendments.
  • Removing DE4 and/or DE3 or LEG2 drop-down option.
  • Reduction of consequential loss cover.
  • Addition of water management type conditions.
  • Heat conditions.
  • Removal of low-claims rebate.
  • Addition of infectious disease exclusions.

More alarming is that some of the conditions being required by insurers are condition precedents, therefore these clauses must be complied with. Otherwise, in the event of a claim, insurers might be able to avoid liability. And in addition to the amendments to the coverage and increase in excesses, we also see an increase in the rates charged by insurers.

To ensure consistency in terms, some insurers with global footprints are removing authority from regional underwriting teams and placing it with their central offices. Particular focus has been around DSU coverage, especially coverage for infectious disease, cessation of works, and denial of access extension provisions, with most now implementing a range of specific exclusions driven by COVID-19.

The overall period of policies is becoming an issue for underwriters. At the time of writing, maximum periods of seven years (including defects) were the most that one market was prepared to offer. In another instance, any period of more than seven years required signoff from head office.

Areas of concern

Residential portfolios

We’re seeing some insurers withdrawing from the market and fewer underwriters offering lead terms – particularly on structures of more than 11 storeys. There’s insurer caution around portfolios with a poor claims experience, or where the risks are outside of their core underwriting appetite. As a result, premium rates are increasing and cover is more restricted. Greater emphasis is being placed on analytics and reliable data, especially in respect of claims and the risk management of assets. However, despite this, there’s still an appetite to underwrite well risk-managed residential portfolios.

Water damage

Water damage is a huge market concern. Escape of water claims (which account for approximately 60% of all claims) dominate loss ratios in the residential sector, and we are seeing instances where water damage is excluded from policies.

Insurers are keen to work with brokers to identify sites that perform poorly from a claims perspective. Many markets are encouraging clients to follow the advice in Managing Escape of Water Risk on Construction Sites, the guide issued by the Construction Insurance Risk Engineer Group, and endorsed by the UK CAR Underwriters Group. One key lead insurer insists on automatic water shutoff valves as a condition.

Timber frames and cladding

Timber frame buildings continue to be a challenging area. If you’re looking to obtain cover for a project of more than three storeys, you may face some issues, even with adequate separation between blocks. Market rates for timber frame buildings can be three times those of a steel frame build, and those policies come with higher excesses.

Since the Grenfell fire tragedy in June 2017, underwriters have been cautious about cladding. As a result, they’re seeking a greater understanding of full construction methods, focussing on the composition and installation of cladding, especially with projects more than 18 metres high.

Securing competitive premiums in a transitioning market

Engage early with your broker

Allowing as much time as possible to engage in the insurance discussions will help limit cost increases and improve risk profiles. Companies should make time to work with their broker to develop an organised and methodical risk transfer process. The more effort deployed in the early stages to develop and evaluate risk information, the more effective the risk transfer.

Market yourselves effectively

When engaging with insurers, it's important to take every opportunity to demonstrate a greater understanding of market developments, current conditions and the risks involved. Illustrating stringent construction risk management and transfer strategies will help present a solid risk profile.

Collaborate with your key stakeholders

Construction company C-suites should work with their project personnel and risk and insurance managers to comprehensively understand their risks. And risk managers should engage at a very early stage with their construction insurance brokers to organise and deliver comprehensive underwriting presentations.

Be prepared for questions

Insurers are utilising risk engineers to review all information, and this will be scrutinised far more than before. Expect additional questions following the review of information. Respond to these questions promptly and in detail.

Satisfy the subjectivities

Insurers might also provide terms "subject to...". These conditions must be satisfied, and cover and terms cannot be fully confirmed otherwise.

Navigating the market

As the market continues to transition, it might become harder to complete placements due to a lack of capacity, even with higher premiums and reduced cover. By partnering with the right insurance broker for your construction insurance and contractor insurance needs, you can positively affect underwriters’ perception – which can help to limit cost increases and improve risk profiles.

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