For the past 15 years, businesses in the construction industry have enjoyed the benefits of a soft insurance market, particularly within the Contract Works & Liability and the Professional Indemnity markets. This soft market was largely due to the plentiful competition and profitable investment returns for insurers. But over 2018 and 2019, the momentum shifted when we saw a significant drop in the number of players in the London market, extensions of cover reduced and a reduction in the sub-limits. This, combined with an increase in excesses heralded the end of the soft market, ushering in the much-anticipated hard phase of the insurance market cycle.
When London sneezes, Australia catches a cold
The Australian market was subsequently hit with increased claims frequency, at a time where the pricing that underwriters were charging for the coverage offering was already below what was required for insurers to remain profitable. This created a drastic repricing to correct previously poorly written policies which has in turn created the increased pricing, indicative of a hard market.
In addition to the repricing, the hard market added additional complications with submissions to underwriters often requiring more detailed information to be provided. The implications of this continue to mean a longer lead time with many underwriters requesting to meet with the client to ensure adequate levels of professionalism within the business. No longer can a broker rely on providing a semi-completed proposal; full transparency and details are now a non-negotiable requirement.
What does this mean for construction businesses?
Insurers who remain in class want to know about the business solvency, business plans, risk management plans, a detailed listing of materials used, the details of any subcontractors (including their experience) and what other insurance policies are in place. Insurers need to be readily able to understand the business operations, so it is important for businesses to have strong protocols in place regarding updating and maintaining this type of information.
This increased scrutiny is common, and we are seeing several PI insurers requesting confirmation of the insured’s construction coverage, with some refusing to provide terms where these policies have coverage restrictions that include workmanship and/or material exclusions. It is critical to ensure that insurance policies within a business that include exclusions do not negate other essential insurance policies. A good broker should combine a risk assessment of your business with their in-depth knowledge of insurance policy wordings to ensure against situations such as these.
COVID-19 has also added another layer of complexity with many insurers asking for further detail on the business’ planning around work delays and scheduling when a state is locked down and what funding is available to navigate any cessation of work due to COVID-19. It would be prudent for businesses to detail their work-around plans for any COVID related incidents that may affect their operations.
2021 and beyond
As we continue through 2021 in anticipation that remediation strategies imposed in recent years will plateau, we believe the market will continue to see an increase in pricing with an especially long tail (PI & Liability) until underwriters can see improved results. In positive news, we will see less of the knee jerk approach underwriters have undertaken over the past 18 months in terms of pricing.
Whilst we saw one Australian insurer remove themselves from the construction market already this year and the PI market continuing to balance their books, we believe we will see new entrants emerge either locally or via increased capacity in London, resulting in competitive premiums as new insurers offer increased capacity.