Insurers and risk managers need to pull out all the stops to support the beleaguered UK construction sector, which is facing extreme pressures post Brexit.
Many construction firms require tailored help to deal with soaring inflation, rising insolvencies, a fall-off in projects and the likelihood of many being under-insured.
Our analysis has found that construction firms are under siege as never before and their existing insurance programmes may be inadequate in terms of meeting existing and emerging risks.
“The recent crisis events, including most recently the pandemic and the war in Ukraine have had a particularly negative impact on the construction sector across Europe, however, while some other countries are bouncing back, the UK is floundering. From talking to construction clients, I know how concerned they are. But, we must take decisive action and that means ensuring businesses are as well placed as possible to take on these challenging conditions – and that means ensuring they are well protected by their insurance. The UK’s construction sector has shown it can weather severe storms, but it needs proper support from the insurance industry, as that will boost resilience and see them through these extreme conditions.” says Bruce Hepburn, Mactavish CEO.
Costs of construction insurance soars
A steep rise in risk is adding to the rising cost of insurance for construction firms. Overall, Mactavish has noted that UK insurance prices have doubled since 2018 (or increased by four times for some classes like D&O or Professional Indemnity), with these insurance cost increases significantly higher in the UK than for international counterparts. Since the UK left the EU, the price of commercial insurance in the UK has risen by over 100% compared to a 60% rise across the rest of the world.
We believe construction cover will be affected by shrinking capacity and widening exclusions in a number of areas, such as Professional Indemnity and Construction All Risks (CAR) cover, particularly for complex projects.
The gathering storm clouds affecting construction firms
- Severe labour shortages – too few people pushes up risk
Labour shortages are causing serious problems for the construction industry and raising risks. This will make cover increasingly difficult to place, prompting insurers to increase premiums and limit protection.
When there are too few workers, there can be greater likelihood of accidents, which could lead to more liability claims, fines and intervention by the HSE. Insufficient numbers of workers can also lead to delays, errors and the potential for contractor insolvency.
EU workers leaving the country because of Brexit has caused major difficulties on building sites up and down the UK. Over one in three construction firms (36.3%) has said they were dealing with labour shortages. (Office of National Statistics November 2022). The Civil Engineering Contractors’ Association also found 75% of construction companies said they had supply problems with skilled operatives and 63% had shortages of unskilled labour (November 2022). Further, construction is the second worst affected sector in terms of worker shortages – with nearly 21% affected (hospitality is number one at 35%) according to the House of Commons UK Library.
- Material shortages and supply chain delays
Supply chain disruptions, particularly where materials are being imported from Europe and further afield, have ratcheted up costs and created delays. As with labour shortages, not having enough materials increases risk, in terms of delays or in some cases, where lower or less suitable alternatives are used. Timber, steel and concrete, along with tools and machinery, are all impacted.
Some European suppliers may be more willing to provide goods to other EU partners to avoid the increased checks and uncertain regulations resulting from Brexit. The shortage of lorry drivers had a further impact. Further, the domestic HS2 and Hinkley Point C projects have also used up vast amounts of concrete, which has caused a negative ripple effect on other works.
- Rampant inflation raises risk of under-insurance
Inflation has proved hugely problematic for the construction sector, resulting in pressure on wages and large hikes in building materials. When costs are shooting up, the risk of under-insurance increases substantially. This leaves construction firms highly exposed in the event of a claim.
In a recent survey, construction consultancy Gleeds found 87% of respondents said inflation was impacting on the viability of projects.
The UK Trade and Business Commission (UKTBC), a cross-party group, found the cost of construction materials has risen faster in the UK than in the EU since the Brexit referendum in 2016: increasing in the UK about 60 per cent compared with 35 per cent in the EU over the same period.
In addition, data from EU member states, the central EU database, Eurostat, and the UK Department for Business, Energy and Industrial Strategy showed that between 2015 and 2022, the cost of construction labour in the UK went up by 30%.
- Mortgage woes increase the risk of market slowdown
Private housing remains the largest construction sector, which means more expensive mortgages and falling wages make buying property less attractive. According to the Bank of England, the number of mortgage approvals fell to 35,600 in December 2022 from 46,200 for November – the fourth monthly consecutive fall.
For insurers, there will be a concern about more empty properties and the fact that developers and contractors will have more pressure on their balance sheets, as well as uncertainty over whether insurance policies cover completed but unsold stock. Any fear over developers cutting corners in this environment will lead to further increases in professional indemnity and CAR insurance rates.
- Rising construction sector insolvencies worsens the risk environment
More construction firms going bust is bad news for the sector and the economy as a whole. If there have been warning signs that a contractor is in trouble, then there could be a rise in insurance claims, for example, linked to crime, employers’ and public liability and D&O. Claimants may also look to make claims from a parent company, if one exists. Overall, insurers are likely to become increasingly cautious about providing wide-ranging cover to a sector that is experiencing more insolvencies.
Recent government statistics (October to December 2022) show construction topping the list of worst affected sectors, accounting for as many as 19% of insolvencies.
- A troubled sector is a threat to health and safety standards
Financial pressures across the construction sector are likely to lead to poorer health and safety standards. This is linked in part to labour shortages and more reliance on inexperienced workers. For insurers, there will be concerns that businesses they insure could be cutting back on their health and safety programmes which could lead not only to claims but also to associated disputes arising from alleged policy breaches or non-disclosure.
Looking further ahead, risk could be increased further via the Retained EU Law (Revocation and Reform) Bill, which will scrap EU laws. One possibility is that the Work at Height Regulations could be dropped. This has been criticised by the Access Industry Forum, which is the trade body for 10 associations involved in the sector, and has concerns about any change leading to a rise in serious injuries and fatalities.
- The Post-Grenfell market – changes proposed as risk environment remains highly uncertain
The Grenfell Tower disaster has led to a major remediation programme to remove dangerous cladding and improve fire safety across the sector. For insurers, there are huge numbers of claims in the pipeline connected to cladding and other risks connected to building materials. This remains an unfolding picture as the government and regulator seek to ensure insurance remains affordable to leaseholders and to eliminate bad practices in the market, such as where excessive commissions have been charged.
There is also new legislation and a need to adapt to new building regulation standards.
This exists in the Building Safety Act 2022, which is hugely significant for the sector covering various aspects of design, construction, occupation and workplace safety.
One key change of this Act is in requiring companies to revisit a wide range of their compliance policies and potential reallocation of liability between parties, in particular in relation to cladding and fire risk and the large number of existing disputes and insurance claims in this area.
Insurers and brokers must support construction clients
Bruce Hepburn concludes: “The raft of new and evolving risks and ongoing cost pressure on insurance is particularly bad news for the construction sector. Under insurance due to inflation is now incredibly common and could prove disastrous in the event of any claim, whether large or small”.
“The replacement value of assets has soared. Some firms may not realise that they are now under-insured and this is why we are doing everything we can to raise awareness of the situation. We are also calling on insurers to help in ensuring they play their part in supporting companies in pragmatically addressing revaluation needs rather than simply including punitive policy terms.”