The British economy has suffered significantly over the past 8 months and another lockdown and continuing uncertainty over “deal or no deal” on 31 December is doing little to improve the situation.
Construction Insurance

The construction industry is by no means the only sector to have been adversely affected during this period. However, it is one of the few to be able to quantify the impact and offer some thought on how the future may look.

Cardinus Risks Management Ltd, a leading health, safety and risk management specialist has provided valuable support to the clients of Gallagher for a number of years. Their regulatory body, RICS, through its Building Cost Information Service (BCIS) has offered some interesting insight which may have real interest to the Public Sector.

The RICS forecast Document issued in July 2020 offers the following comment on current situation in the construction market:

  • Construction Tender prices in 1st quarter 2020 rose by 0.3% compared with the previous quarter, but remained unchanged compared with a year earlier
  • Construction Materials prices fell by 0.3% in 1st quarter 2020 compared with the final quarter of 2019, and by 0.7% compared with the same quarter in 2019
  • Construction Building costs fell by 0.3% in 1st quarter 2020 on a quarterly basis, but rose by an annual 1.1%
  • New work output fell by 1% in 1st quarter 2020 compared with the previous quarter, and by 2% compared with a year earlier. In April 2020 new work output fell by 41% on a monthly basis and by 45% on an annual basis. In May 2020 new work output rose by 11% in May 2020 compared with the previous month but fell by 39% compared with the same month in 2019.

Whilst there was relatively positive start to the year the last comment indicates a worrying but not entirely surprising development.

The RICS has gone on to forecast (for period 1st quarter 2020 to 1st quarter 2025) the following:

  • New construction output to rise by 16%
  • Costs will rise by 17%
  • Tender prices will rise by 21%
  • The main risks to materials prices will be difficulty in obtaining materials during the Covid-19 crisis, oil prices, tariffs on imports and sterling exchange rates
  • Nationally agreed wage awards are unlikely to increase over the next year, but will be affected by restrictions in the availability of European labour from 2021

Whilst the RICS states that this forecast may fluctuate, the forecast was made on the assumption that there would not be a significant second COVID-19 wave. Unfortunately, events have rather overtaken us with the current lockdown and this is likely to have a negative impact.

The impact of this forecast, if correct, could be significant for any organisation who choose to insure their property. Property insurance is (in the vast majority of cases) based on the reinstatement value of the property to be insured. Whilst most property policies will offer a degree of protection for increasing costs during a policy period, premiums and coverage are based on the reinstatement value being provided to the underwriter initially. If the figure provided is inaccurate, Insurers may reduce claims payments by an amount equal to the proportion of underinsurance and in the most extreme cases avoid an indemnity in its entirety.

Given the RICS forecast, every organisation should carefully consider the adequacy of the insurance values they provide to their insurers. These will be impacted by increased costs and the availability of materials. Failure to declare correct reinstatement values could have serious implications.

As a national surveying company, conducting thousands of Reinstatement Cost Assessments each year Cardinus has already seen some significant underinsurance.

If you are unsure about your current insurance valuations please contact your Gallagher representative who would be happy to discuss with you and, if necessary, would be happy to facilitate a discussion with Cardinus.