As the construction industry emerges from the lockdown phase of the Covid-19 crisis, another economic challenge looms ahead. Construction PI insurance, which was already seeing drastic price increases and coverage restrictions before the pandemic, is expected to rise further – at rates which might be financially unviable for some companies.
For over a decade, Construction PI benefitted from the soft insurance market, with rates consistently decreasing or staying stable. However, there has been a dramatic rise in premium rates since 2018 with less cover on offer. This is due to two primary causes.
Firstly, the Grenfell Tower fire in 2017 led to a surge in claims and meant insurers became more cautious about the risks they were prepared to take on, whilst also introducing new policy exclusions.
Secondly, after incurring significant losses in 2017 (and again in 2018), Lloyd’s instigated ‘Decile 10’ reviews – requiring syndicates to identify the worst performing 10% of their business. Once identified, agreeable plans for improvement had to be submitted by the syndicate, or the business lines were automatically placed into run-off. A 2018 report on the Decile 10 reviews revealed that non-US PI was the second worst performing class of business, with 62% of syndicates recording an aggregate loss on their non-US PI portfolio over the previous six years.
These factors mean that capacity in the Construction PI market has ‘roughly halved over the past 18 months’ as insurers refuse to underwrite these risks. This capacity restriction was already translating into market realities before Covid-19 – in January, the Civil Engineering Contractors’ Association reported that 92 per cent of contractors have experienced substantially increased PI premiums. Moreover, ‘more than 70 per cent have seen their PI insurance costs rise at least 20 per cent at their last renewal, with costs more than doubling for 22 per cent.’ At the same time, the breadth of cover is reduced via lower limits, higher deductibles and new or wider policy exclusions.
These price hikes will be further provoked by the Covid-19 pandemic which has caused an estimated $100bn in claims losses and even greater damage to insurers’ investment portfolios. This massive loss of capital and revenue coming on top of historic losses will inevitably invoke increased underwriting scrutiny; if insurers choose to take on Construction PI risks at all they will do so for a hefty price, particularly as Lloyds is retaining Decile 10 reviews for 2020.
What can be done?
All of this leaves construction firms in a deeply uncomfortable position. Having Construction PI policies with high limits in place is often non-negotiable for many firms. Project leads or contracts will often require firms to have specified PI sub-limits as a pre-requisite to being awarded a job. As a result, many firms will be looking to their brokers to help them find a solution that allows them to remain in business.
However, as we recently demonstrated in our high-profile Broker Conflicts Report, up to 78% of broker income comes from insurers rather than insurance buyers, and much of this is linked to premiums. This means that there is less incentive for brokers to work harder to acquire Construction PI coverage at lower rates. As PI coverage becomes more expensive, causing hard-pressed construction margins to decrease, brokers can in fact increase their profits.
Policyholders don’t need to accept either price hikes or poor broker representation. Mactavish encourages all of its clients to think carefully about how they market and present their risks as, even in a hard market, this can make all the difference. We also recommend that buyers who aren’t being given viable solutions by their brokers run Written Lines Tenders (WLTs) in order to inject some much-needed competition and a simplified focus on the two things that matter most: policy reliability and cost. WLTs are competitive bids in which two or more brokers are run against each other, each with their own preferred insurers and solutions. This approach has the benefit of ensuring that no matter how much your broker stands to make off placing your risk with a given carrier, you have still achieved the best possible price and cover. Indeed, in recent tenders we have run for clients we’ve been able to achieve 20-50% savings against broker estimates whilst also making major improvements to the policy wording.
If you are looking to make a change to the way your company is treated by the insurance market, contact Mactavish and a member of the team will talk you through some of insights and success stories.
Josie Dallas, Analyst