Building warranty insurance, otherwise known as structural warranty, or latent defects insurance has, like many markets undergone significant transition in recent years. Major social, political and economic events such as the Brexit referendum, Grenfell tragedy, Coronavirus and the war in Ukraine have all carried significant impacts on the insurance sector. As a result, building warranties have generally become more expensive, harder to obtain and increasingly complex for Housing Associations.
This article will explore the real life challenges facing the social housing sector as a result of these events and why an independent expert can enable you to de-risk the buying process and help you effectively manage your structural warranty requirements.
Contractor Insolvency Cover
Contractor Insolvency cover often represents a key requirement for Housing Associations and may even form part of the Employers Requirements. As the name would suggest, this cover is heavily focused on the solvency of the main contractor and is in place during the build period. The cover will either indemnify a Housing Association of an amount usually 10% of the contract value or the insurer will pay to complete the works. Due to the financial implications, this cover is viewed as a credit risk, and as such, is heavily influenced by economic conditions. In times of economic hardship, in part as a result of rising costs, the construction sector has unfortunately been hit hard by noticeable contractor insolvencies in the past few years. Warranty insurers are therefore less inclined to offer contractor insolvency cover as it is deemed ‘high risk’. While a selection of markets can offer this cover, alternatives are available for housing associations commonly in the form of bonds.
‘A’ Rated Cover
Unfortunately the structural warranty market has had a negative history of poor quality, often, unrated insurance companies providing capacity to warranty providers. This has led to noticeable insolvencies in recent years such as the collapse of Elite2, Alpha/CRL1 and East West Insurance Company3. Insurer failure has significant consequences for any insurance contract however long-term policies such as building warranties are generally the worst affected as they will need to be replaced within the 12 year policy period. Retrospective policies can be costly and confusing for property owners. It’s critical to ensure that the underlying insurer behind the building warranty has a minimum of an A-rating with one of the major rating agencies. It is not always obvious as to who the underlying insurer is, or indeed their financial strength. Gallagher’s panel of warranties4 have been carefully selected with financial strength at the centre of our criteria and is constantly reviewed to ensure it meets the needs of our clients.
Closely linked with the financial issues discussed above, retrospective cover commonly refers to an application for building warranty insurance following the completion of a project, or when works are substantially complete. Typically, warranty insurance is recommended to be taken out prior to works commencing in order to allow the warranty provider to conduct inspections (commonly known as technical audits), throughout the build. However, there are a number of reasons why a Housing Association might require cover retrospectively, most common of which is following a contractor’s insolvency during the build phase/prior to warranty issuance. In this instance, the existing warranty is likely to be withdrawn on the basis of a ‘material change in risk’ and the Housing Association will have no choice but to seek alternative cover.
In these instances, premiums are very likely to be more expensive and the choice of warranties will be fairly limited when compared to before. Options may be limited to a handful of insurers including those that are unrated and the risks associated as has previously been discussed. Some contractor insolvency issues can be mitigated by an owner-led approach whereby the Housing Association retain ownership and control of the constructing process. Again, having an independent insurance professional to help obtain retrospective cover is crucial to ensuring a suitable replacement can be sourced.
‘Hard’ Market Conditions
Hard market conditions is an industry term that refers to the lack of available insurance capacity in a given sector following the withdrawal of capital. Capital may refer to whole insurers pulling out of the market or reducing the amount of business they wish to underwrite. This in turn leads to reduced competition and higher premiums. While hard market cycles are by definition, temporary, there are no guarantees of how long these trends can last and whether capacity and rates will return to the previous ‘soft’ market levels. The structural warranty sector is undoubtedly in the midst of a hard market cycle, highlighting the need for independent impartial advice and choice.
In summary, there are evidently a number of challenges facing the Social Housing Sector in respect of structural warranty insurance. The significant events of the last few years have had a ‘trickle down’ effect on insurance availability, price and quality. Now more than ever, is the need for a straight-forward, transparent service broker-led option to help alleviate some of the pain points often experienced when navigating this market.
For more information, please reach out to a Gallagher representative.