Global Construction Insurance Trends – Is it possible to get off the insurance rollercoaster?

Unless you have been living under a rock, anyone involved in the building industry will be aware of - and in many cases been victim to - the contracting insurance appetite for construction risks in the building sector.  

Stories of premium increases of between 25% to 100% for Professional Indemnity (PI) insurance have become commonplace for many in the building industry and things only appear to be getting worse. In June this year, the last provider of exclusion free PI insurance for building surveyors, certifiers and other construction professionals, Landmark Underwriting, ceased underwriting this class of insurance leaving many businesses with non-compliant insurances.

Lloyds of London, the birthplace of the modern insurance industry and the market where hard to place risks globally often find a home in hard market cycles, is unable to come to the rescue. Lloyds are taking a strong stance with all syndicates on poor performing portfolios, which includes Professional Indemnity for Australian risks, meaning there is not enough alternative capacity available at Lloyds to make any meaningful impact on premiums in this sector.

Lloyds are taking a strong stance with all syndicates on poor performing portfolios, which includes Professional Indemnity for Australian risks, meaning there is not enough alternative capacity available at Lloyds to make any meaningful impact on premiums in this sector.

The various State government departments responsible for administering licenses for the building industry have been forced to accept non-compliant insurances, at least for the interim. They are pointing the finger squarely at the insurance industry for walking away from building professionals in their time of need however, it is arguably politicians and governments failure to act earlier on emerging compliance and oversight issues in the industry that has ultimately led us to this point. The Shergold Weir report (which was commissioned and eventually presented to the Building Ministers’ Forum back in April 2018) highlighted serious shortcomings and inadequacies in a number of areas in the building industry.  Despite the serious nature of the issues highlighted in the report, government departments appeared to lack any motivation to even consider the reports key recommendations. It was only following Landmark’s withdrawal of PI for building professionals in Australia that any meaningful action took place; however I hasten to add that the current activity is only the first steps in what will be a long and difficult process.

The non-compliant cladding issues plaguing the industry is a massive challenge on its own but as cases like Opal Tower, Mascot Tower and numerous others continue to hit the news, the insurance industries current position shouldn’t come as a real surprise.  

If the various State governments and the broader building industry adopt all or most of the recommendations in the Shergold Weir Report, we will eventually see insurance appetite for the building industry return. However, a number of the more meaningful recommendations will take many years to fully implement and even then, it is unlikely that the commercial insurance market will agree to underwrite legacy risks.

So what do those in the building industry do in the interim?  Is it simply inevitable that everybody will be forced to take the ride to the top of the roller coaster and will just have to accept higher premiums/deductibles and even worse uninsured risks or are there things that you can do now?  Whilst some degree of premium increase is probably unavoidable, the size and/or impact of the insurance terms and conditions negotiated is largely in your and your insurance brokers’ hands.  

All experienced insurance brokers are highlighting to their clients that time and information are the two key ingredients to successfully mitigate premium increases in the current market conditions; with both in hand they will be able to negotiate with insurers and produce the “best result” available.  Whilst these are both important factors, it is equally important to have:
1.    a clear and executable market engagement strategy; and 
2.    a compelling and unique insurer submission/presentation.

Market Engagement Strategy
Insurer engagement is critical in the current insurance market; your broker should have a clear strategy around the who, when and how.  “Casting the net wider” is a term bandied around by brokers regularly, however, this does not necessarily mean approaching more insurers; it simply means considering markets that may have not historically been competitive or viewed as a viable alternative. More is definitely required by all but unless your challenge is around capacity, the focus should be on identifying the right insurer partners and underwriters and improving the quality and quantity of engagement with those particular insurers.  

The strategy also needs to include alternative plans - Plan A will not be enough, Plans B, C and even D should be part of the original strategy and be ready to execute at a moments’ notice.  As has been experienced in the last few years, the market can move quickly and your market engagement strategy needs to be flexible enough to cater for unforeseen events and changes.

Some insurance brokers make the fatal mistake of simply sending submissions to every conceivable insurer.  

Some insurance brokers make the fatal mistake of simply sending submissions to every conceivable insurer. This strategy is often more detrimental as underwriters (who are currently being inundated with quotation requests) will often ignore or worse decline these requests; instead they will “cherry-pick” deploying their valuable capital and time on compelling opportunities or those that better fit their underwriting appetite.  

Insurer Submissions / Presentations
Like most people, once an underwriter has a perception about a risk or business, it is hard to change their view; making sure the first impression of your business is a positive one is critical.

Insurer submissions need to be persuasive and present your business in a positive light!  It should include more than the relevant underwriting information, it should tell a compelling story about your business that is unique and different. You (and your broker) need to demonstrate why your risk is better to others in your industry. Without this, the underwriter has no reason to apply different terms and conditions to any other risk that hits their desk.

The above sounds simple but the reality is that many in the insurance industry are still struggling to adjust to this new world. Following nearly two decades of soft market conditions where brokers could negotiate premium savings for their clients with very little underwriting information (let alone a full insurance submission) means that we now have a generation of brokers that have not had to broke business in a hard market.  

The reality is that the insurance world has changed and businesses (and their brokers) need to adapt their approach when negotiating insurance terms and coverage. Those that acknowledge and embrace this change will survive and even potentially thrive as the issues facing both the building and insurance industries continue to evolve.

Lockton is a specialist construction insurance broker.  We would welcome the opportunity of meeting with you to discuss how insurance may be better utilised to protect your project. 

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