In order to adequately prepare for this year’s renewal process, housebuilders need to be confident that their risk is being correctly presented to insurers. Additionally, it has never been more important for housebuilders to be confident that they understand their professional risk profile, to allow them to both mitigate and transfer their risk.
Housebuilders – presentation of risk
The changing dynamics of the insurance market brings into sharp focus the importance of the presentation of the risk (underwriting submission). As Insurers become more demanding of high quality underwriting information, how confident are you that your risk is being clearly articulated to insurers?
In order to achieve suitable terms and tailored coverage, housebuilders must work in partnership with their broker to produce a comprehensive underwriting submission. The submission should include details of the risk management strategy and demonstrations of why your risk profile is attractive to insurers. By partnering with an experienced insurance broker, clients may be able to mitigate the pressures of the hardening construction insurance market by accurately articulating their risks.
1. Financial Information
Data on house completions, build cost and turnover are readily obtainable, but these facts alone do not capture the risk profile of a housebuilder. For example, do the turnover figures detail whether the company or the supply chain are contractually responsible to insure the works? The turnover figure associated with works insured by the supply chain is a highly negotiated risk position and the premium rate applicable to this should be significantly lowered. By clearly differentiating where contingent cover (also known as Difference in Conditions cover) is required, housebuilders should see a positive improvement in their Construction All Risks, Third Party Liability and Professional Indemnity premiums.
2. Claims information
Your claims experience will have a significant impact on how insurers view and rate your risk; it is the “Acid Test” of how the Insured has been managing their risk. Due to the arrangement of the supply chain, a snapshot of claims provided to insurers ahead of renewal can mislead insurers.
A housebuilder will usually require their supply chain to assume responsibility for arranging their own insurance for on-site activities but what happens in the event of a claim? Typically the housebuilder’s insurers will be advised of the loss, be it damage to the works or third party injury/property damage. This is good practice as precautionary notifications should always be made where there is a potential claims exposure. However, this notification may lead to insurers applying a full reserve on the claim, which then artificially inflates the claims experience.
The methods your insurance broker should assist in mitigating against this:
a. Claims Auditing
The claims experience should be audited regularly to ensure it reflects the potential recovery from the supply chain. This can take the form of detailed round table reviews or broker claims teams accessing insurer files to understand the process and rationale for current reserving strategy.
b. Claims Analysis
As the recovery process can take some time, it is essential to use a claims triangulation to show how a loss experience develops. The triangulation documents the claims incurred (paid and reserved claims) for each policy year and tracks how the claims position has developed over the subsequent years post expiry. In order to demonstrate this to insurers, your broker should calculate the Loss Development Factor (to estimate future loss positions based on historic claims experience) thereby allowing a more accurate rating factor to be applied.
3. Risk Management Information
Due to the historic soft market conditions, risk management has been an overlooked area when underwriting submissions are produced. A clear strategic plan for mitigating risks must be provided to insurers, who will usually allow this to influence the rating models applied.
This is the opportunity for housebuilders to truly differentiate themselves from their peers. Critical information should include:
- The risk transfer achieved through indemnity and insurance clauses in template Trade Contracts
- Details of the construction methods used eg Modular or Timber frame construction
- Details of how rigidly these clauses are adhered to and the amendments deemed acceptable
- Design strategy including details of critical design partners and their liability provisions under contract
- The number and complexity of unit designs used
- Overarching Health & Safety strategy and initiative
The presentation of risk is the most critical aspect of the renewal process. For housebuilders, it is an opportunity to demonstrate how your risk profile is different to that of a typical design and build contractor.
Professional Risks profile
As a housebuilder, it is important that the scope of professional risks are fully understood thus allowing effective risk transfer and efficient risk management. This is not just good corporate governance but it is essential to achieve optimum terms from insurers. This section will first look at the drivers for buying PI and then consider the risk profile of a housebuilder.
Why buy PI?
The decision to maintain PI insurance is determined by two factors; contractual requirements and balance sheet protection. PI is often seen as a ‘license to trade’ on the basis that almost all construction contracts require that a Contractor maintains a defined level of PI insurance. This provides the Employer with assurance that the Contractor is able to finance their liability arising from professional error or omission. However, contractual PI insurance requirements will rarely apply to housebuilders where they take the role of both land owner and management contractor, and there is no conventional Employer-Contractor relationship.
This position may differ on a case by case basis, particularly where the housebuilder is working in Joint Venture with Local Authorities, so it is important that housebuilders review and understand all contractual insurance requirements to ensure contractual compliance.
While housebuilders may not be subject to any contractual drivers for the procurement of PI insurance, the cover can act as a valuable tool for balance sheet protection. Given that PI claims are typically low frequency and high severity in nature, uninsured losses pose a significant risk to the financial stability of a company. By forecasting maximum exposure and appropriately insuring against this risk, a housebuilder is able to transfer the risk away from their balance sheet.
What are the potential consequences of professional error for housebuilders?
Series Loss Event
A housebuilder will typically design a series of units, including floorplans, material specifications and construction methodology which are applied to a range of individual housing developments. Some housebuilders are currently in the process of streamlining their design by reducing the number of unit designs and in doing so the professional risk becomes even greater. It could mean fewer than 20 basic house types are designed by a housebuilder. If there is a design error in one of the units, it could manifest in every house built to that particular design, this is known as a “Series Loss Event”. A housebuilder only needs to calculate how many units are made from the same design to understand the scale of the exposure. There is a similar risk profile in high rise apartments, where one design fault can manifest in every apartment
Housebuilders can be required to provide infrastructure to surrounding developments and major projects including roads and bridges, which can present complex design challenges. The consequential losses flowing from a negligent design can quickly become expensive. If a housing development becomes inaccessible due to faults in the infrastructure, a housebuilder could be faced with significant costs to temporarily house residents or rapidly design and construct temporary alternative infrastructure.
The ability to recover losses from the supply chain has a significant bearing on the claims experience, which in turn impacts renewal premiums. For housebuilders, the prospects of recovery are limited due to their relatively low spend on their professional services supply chain. Architects will typically seek to cap their liability in line with the value of their work which in the event of a series loss claim will be wholly inadequate to cover the loss.
Understanding your professional risk profile is an important first step for all housebuilders, this then allows deeper analysis of how the risk should be treated, for example managed internally or transferred externally by contract or insurance.
Where risk transfer is by insurance it is important that the policy coverage is tailored to the specific needs of the housebuilder and that key cover restrictions which may materially affect the quality of the transfer are identified and avoided.