In 2017, several major natural catastrophe events, led to losses of around USD140bn.
Construction Insurance

In 2017, several major natural catastrophe events, Hurricanes Harvey, Irma and Maria, led to losses of around USD140bn. There were concerns that these, and localised losses such as the severe wildfires seen in California, might lead to rate increases in the international insurance markets.

However, despite the prevalence of recent major natural disasters, the good news for buyers is that the knock-on effect to the construction insurance market has been quite limited. In fact it is water damage claims arising from burst pipes and the like, which appear to be becoming an increasing focus for underwriters in 2018. This trend was first noted in the US, where shrinking premium pools led to more thorough investigations of attritional losses, revealing the large share of total claims that these losses comprise. This is now starting to become an issue for underwriters in the UK. Increased underwriting scrutiny has also become apparent in the timber framed building sector

Yet despite all this varied loss activity, Gallagher has seen little or no upwards pressure on premium rates or changes to general policy terms and conditions in the construction insurance market

Substantial surplus capacity

The main reason for this is the continued availability of large amounts of surplus capacity in the market as a result of continued profitability of this class of business.

Between 3-5 years ago Lloyd’s syndicates hugely increased their capacity for construction business; they have been joined in the last couple of years by other new entrants. For example, Aviva has now entered into international construction insurance and Mapfre have established a London office to handle London market construction risks, amongst others. Further, there have been no significant insurer withdrawals from the market in the last few years and no treaty issues, despite some uncertainty in the market in November 2017 triggered by increasing market acquisition costs.

Having said this, one area where we have experienced some difficulty in securing capacity is in the timber framed sector, where losses and the increasing of height limits in the US have seen underwriters become very wary before committing capacity to this type of construction risk.

In other developments

Annual Contractor PI Market and the impact of Grenfell

One area where we have seen extensive pressure on the market is during renewals for Annual Contractor Professional Indemnity (PI). This has been driven by the ongoing investigations into the causes and effects of the Grenfell fire together with a number of other Annual PI claims. In the immediate aftermath of Grenfell, underwriters did not fully understand what the wider impact of Grenfell would be, particularly around likely changes to building regulations and building design standards following the investigation. This environment of uncertainty has led to them turning down contractors erecting large amounts of cladding, while others have drastically reduced capacity. Deductibles are also increasing for some façade coverages.

In this marketplace, contractors need to be mindful that PI renewals are likely to be more complex than previously and, therefore, clients will need to begin their renewal preparation earlier to allow time to understand and collate any additional information required by underwriters.

Effect of Ogden Tables changes

The significant reduction in the Ogden Tables discount rate, which assists in the compensation calculation of personal injury and fatal accident court cases in the UK, has had a marked impact on the Employers’ Liability (EL), Public Liability (PL) and Motor markets, which will have a knock-on effect on UK contractors. The motor market has been particularly hard hit with all insurers having to review claims reserves for more serious cases. Lloyd’s syndicates as a result of their underwriting of more hazardous trades have in some cases had to increase rates due to their greater reliance on reinsurance. There is due to be a further government review of discount rates.

Inherent Defects Insurance (IDI) market

IDI is an area of the market where we have seen some notable developments, with several new entrants establishing themselves in a sector previously dominated by Allianz. These include Castel, an MGA with £70m of capacity, Helvetia in Switzerland, and Munich Re. Munich Re in particular has developed a real appetite for this business in order to offset dips in market share caused by current soft market conditions in the mainstream construction market.

The impact of the collapse of Carillion

The compulsory liquidation of Carillion in January 2018 made newspaper headlines and will have come as a shock to many. However, the seeds of the company’s downfall were sown some time ago and those in the market with stringent due diligence procedures will not have been involved in Carillion contracts in any case. Indeed, despite the surety market in the US having been substantially affected by the collapse, we do not envisage at this time that this event will have a major impact on the wider construction insurance market. Having said this, the case does highlight the benefits to owners of procuring an Owner Coordinated Insurance Programme (OCIP) which covers all stakeholders and contractors working on a major project, thus making it easier to bring new contractors into the programme should the need arise.


Generally speaking, we are very much still at the bottom of a soft cycle in the construction insurance market with no sign of significant rate increases on the horizon.

In terms of losses which might see a change in this outlook, another severe hurricane season in 2018 could hit market profitability, despite the current high levels of surplus capacity.

We have also seen a renewed focus by underwriters to tighten operational costs, particularly given a recent spate of acquisitions (such as Axis acquiring Novae Syndicate, and AIG purchasing Validus (Talbot) Syndicate), and these in turn could see an increase in rates in due course.

The message for buyers, particularly in the Annual PI market or those with more complex risks, such as timber frame, need to ensure they allow plenty of time ahead of renewal so that their broker has sufficient time to suitably differentiate their risks to insurers, thereby minimising the chances of rate increases or changes to policy terms and conditions.