UK Construction Insurance Market Update
Last year was not an easy one for the UK construction industry. COVID-19 and Brexit continued to disrupt with project delays, supply chain issues, price inflation and the availability of labour all proving a challenge.
The construction insurance market was a little more positive than previous years, although the surety market continued to be hard. In the year that saw world leaders gather at COP-26 in Glasgow, the environmental impairment liability (EIL) insurance market provided a star performance with insurers reporting a very busy year of growth.
A welcome return of stability
The Construction All Risks (CAR) market was relatively steady in 2021, with little by way of meaningful capacity leaving or joining the market. Rates increased, but gently, particularly when compared to the severe jumps of the previous two years; other terms, such as deductibles, were little changed.
Despite recent rate increases, the long tail nature of CAR policies means that many insurers are still running off policies written during the end of the previous soft market – and are therefore yet to return to profitability. This position should change through 2022 to more accurately reflect the current rating environment, and there remains good appetite and adequate capacity among insurers to complete placements. We have also seen good examples of insurers being willing to support relationship clients as existing policies expire and they are faced with higher premiums.
The D&O market was marked by a quicker-than-expected return to stability in the second half of the year, as the positive results seen in excess towers (a result of new capacity) and a newly competitive approach from existing market participants on the back of an improved COVID-19 outlook led to a softening in the primary space.
Looking forward, there is cause for optimism in 2022, but the waters remain choppy. The many challenges facing the construction industry have left caveats around most rating strategies. ESG factors are also firmly in focus with insurers expecting clients to demonstrate concrete plans to meet targets, rather than accepting ambitious-but-vague statements of ambition.
PI in 2021: more stable, but caution abounds
Greater flexibility on the volume of business insurers were able to write, as well as the entrance of new capacity, saw some stability return to the Professional Indemnity (PI) market in terms of the level of rate increases for well-performing risks – although caution remains the watchword among market participants.
Significant concerns remain over claims related to the increased costs of remedial schemes to rectify cladding and fire safety defects due to non-compliance with building regulations at the time of construction. Following the recent announcement1 of even more wide ranging changes proposed by the UK Government in the draft Building Safety Bill, including:
- extending retrospectively the limitation period to 30 years for safety defect claims, a further extension of the 15 years previously proposed under sections 1 and 2A of the Defective Premises Act 1972
- consultation with industry in relation to a plan of action to deal with and remediate unsafe cladding on buildings over 11m (not just 18m+)
There are concerns that if these points are enacted, there will be significant implications for the industry and, in turn, the insurers, both in terms of future costs, and also in terms of dealing with historic fire safety and other building safety issues. On top of this, is the worry among insurers that further substantial notifications may arise in this area.
The market is also showing signs of vigilance towards modern methods of construction (MMC), particularly as regards offsite prefabrication, with insurers wary when it comes to underwriting exposure. Fears currently revolve around the speed and quality of such work, as well as potential exposure to systemic failures in prefabricated units requiring rectification on a mass scale.
Rate increases continued through last year, albeit at a slower pace in the last six months compared to the same period in 2020. Insurers continue to be cautious on the capacity they are willing to deploy on any given risk, with clients expected to take more ‘skin in the game’ through higher levels of self-insured excesses or co-insurance.
The cautious approach was further evidenced in the range of coverage restrictions that are becoming standard parts of policy wordings. Restricted cover or exclusions for both combustible cladding and fire safety claims are now the norm for UK construction firms. Absolute cyber exclusions have been mandated, following the identification of non-affirmative (also known as silent or unintended) cyber coverage as a threat to insurer solvency, with insurers citing claims for cyber events that had neither been underwritten nor charged for.
Meanwhile, some insurers are imposing manufacturing and transit clauses to exclude claims related to project delays caused by material or labour shortages, where the manufacturing or delivery of products is undertaken by a third party.
Despite expectations that underwriting discipline will remain ironclad through 2022, there are signs of a slightly more positive PI market for most construction firms. With insurers closely monitoring the proposed legislative changes, construction firms are likely to continue to face higher premiums, however, although the level of rate increase will slow.
Corrective action continues
Corrective action that began at the end of 2018, following the Lloyd’s decile ten review, continued through 2021 in other markets, including casualty, contractor and owner/developer insurance. In general, 2021 annual casualty placements saw increases of around 10%, however, we are now seeing a stabilization of these increases and project placements in particular are subject to increasingly competitive insurer behavior.
In the casualty market, insurers have an increased focus on Combined Operating Ratios, a result of several high-profile fires in the last five years. As a result, there is reduced appetite for participation in lower layers of a liability tower, particularly at the £1 million attachment point. When insurers are deploying capacity at this level, they are limiting their exposure and looking to ventilate. As in other sectors, we have also seen a range of restrictions and exclusions creeping into coverage – from cyber to heat conditions, fraudulent claims clauses and a greater focus on PI writeback.
Despite this, there remains significant capacity for the right risks, both well managed and well presented. The quality of the underwriting submission is therefore key: when brokers are able to present meaningful information, they are able to demonstrate competition.
A hard market: surety in the wake of COVID-19
The surety market is perhaps most challenging, as construction companies deal with the difficult operating conditions. After many posted losses in 2020 and contractors took on additional debt to help weather the pandemic-related storm, cash flows remain under significant strain from supply chain issues (in particular price inflation and shortages of materials and labour). It is these issues that underwriters are scrutinizing closely when deciding on available bond capacity.
On the whole, surety rates tend to be fairly stable, however, with underwriters preferring to limit capacity rather than raise rates. New entrants to the market, such as Oakside Surety and First Underwriting, have helped in this regard, adding much-needed capacity.
When it comes to placing bonds, it remains a market where relationships really matter, particularly as face-to-face meetings between underwriters and clients have been curtailed due to COVID-19. With a number of senior underwriters also retiring in the past year, underwriters are leaning much more heavily on the numbers, rather than ability of the people running a project. As a result, companies may be best served by engaging the services of a specialist surety broker to ensure the market is covered, with the most appropriate underwriters on the panel.
The type of project the market has appetite for is also evolving as sureties look to support cleaner, renewable energy, rather than fossil fuels (another shift that may be supported by measures such as the EU Taxonomy). Decommissioning of North Sea oil and gas platforms is a particularly notable challenge. With these obligations now crystalising, the surety market can no longer sit behind a 25-30 year lead time; appetite for taking on new risks at this stage of an asset’s lifecycle is therefore seriously diminishing.
EIL: shining bright
Most – if not all – EIL insurers experienced a year of significant growth in both volume of enquiries and Gross Written Premium (GWP) in 2021, some by up to 50%. The increasing prominence of ESG concerns saw both investors and shareholders seek environmental risk protection, while moves toward Net Zero are driving investment in low-carbon energy projects (renewables, energy from waste).
Property acquisition and brownfield development in a range of sectors – from domestic holiday parks to e-commerce distribution centres – is also booming on the back of COVID-19 restrictions, further pushing demand for EIL insurance. Indeed, the only key limiting factor to further growth is the availability of experienced EIL specialists at insurers and brokers, with both looking to address this issue.
EIL capacity was bolstered last year, with a number of market participants beefing up their resources and offering. Among those, Hartford, part of the Navigators group, boosted its focus on operational environmental risk, leading to a significant increase in GWP. CLS also enhanced its resources and offering – especially for real-estate portfolios, with historic conditions cover potentially available for up to 25 years.
Increasing capacity and desire among all insurers to grow their books kept competition strong. This held rates steady in 2021 for new policies, despite the uptick in demand (and marking a reversal in the previous trend of lower and lower rates, year-on-year). Insurers were seeking nominal ‘inflationary’ rate increases of around 3-% on annual policies and 5-10% on three-year renewable policies, but the competitive market conditions meant this met with mixed success.
When it came to policy wordings, there was movement on PFAS chemicals exclusions, with these now very common for US business/site exposures and increasingly being applied to manufacturing risks outside the US, where there is any possibility of PFAS chemicals being used over the past 10 years. On multinational policies with US businesses/sites, we are also seeing exclusions/restrictions related to non-owned PFAS disposal sites in the US.
On the back of COVID-19, most insurers have now added infectious diseases/pandemics exclusions to their cover, while an increasing number introduced cyber exclusions.
Looking ahead, ESG concerns are expected to continue to grow in importance, particularly following moves in the EU and other jurisdictions to better define what counts as a sustainable investment (although as negotiations over the EU Taxonomy have shown, this is a question fraught with controversy). As a result, expect some insurers to begin offering increasingly innovative products related to property portfolios and climate resilience.
CONDITIONS AND LIMITATIONS
This note is not intended to give legal or financial advice, and, accordingly, it should not be relied upon for such. It should not be regarded as a comprehensive statement of the law and/or market practice in this area. In preparing this note we have relied on information sourced from third parties and we make no claims as to the completeness or accuracy of the information contained herein. It reflects our understanding as of January 2022, but you will recognise that matters concerning COVID-19 are fast-changing across the world. You should not act upon information in this bulletin nor determine not to act, without first seeking specific legal and/or specialist advice. Our advice to our clients is as an insurance broker and is provided subject to specific terms and conditions, the terms of which take precedence over any representations in this document. No third party to whom this is passed can rely on it. We and our officers, employees or agents shall not be responsible for any loss whatsoever arising from the recipient’s reliance upon any information we provide herein and exclude liability for the content to the fullest extent permitted by law. Should you require advice about your specific insurance arrangements or specific claim circumstances, please get in touch with your usual contact at Gallagher.