Building back better

Building back better

The construction market has seen capacity withdrawn and prices surging amid challenges in both material damage and liability

By Wendy Pugh

With natural disasters, flammable cladding, building defect problems, rising worker injury costs and a pandemic, the construction market has undergone a fair amount of recalibration in recent months.

Underwriters have stepped back from areas seen as unattractive and some have withdrawn altogether while pricing has responded sharply after being in the doldrums in an extended iteration of the insurance cycle.

Willis Towers Watson Regional Construction Leader Australasia Iain Drennan says construction globally has experienced challenges, but the local market has seen heightened pressures in response to the plentiful capacity and low prices that had prevailed for so long.

“I would say the shift to remediate portfolios in Australia has been sharper than in other parts of the world, but that is a function of how competitive local premiums had become in Australia,” Mr Drennan told Insurance News.

Prices are still on the rise, with a Willis Towers Watson mid-year update pointing to Australasia primary construction liability rate gains of 30-60%, annual builders risk/contractors all risks increases of 15-25% and primary design and construct professional indemnity gains of 40-80%.

Globally, an unprecedented number of insurers have exited the construction market since the dynamics started changing a couple of years ago, taking with them close to $US1 billion in capacity, international broker Marsh says.

Underwriting control has been shifted from regional branches to head offices, leading to greater alignment between regions, while annual discussions have often become more testing.

“Although insurers’ own treaty renewals have generally gone smoothly in 2021, there is more pressure to manage policy limits and extensions. Coverage and deductible levels have also come under the spotlight across all regions.”

In Australia, Lloyd’s underwriters have pulled back in the past couple of years following a focus on remediating underperforming portfolios, while other insurers also reassessed.

On the material damage side, natural perils and water damage have been a focus, while harder-toplace catastrophe-exposed risks and challenging engineering projects have taken the brunt of larger premium increases.

But it’s the liability and casualty side of the market that is presenting some of the greatest challenges, local brokers and insurers say.

Through the roof: construction premiums are still rising

Worker-to-worker insurance, which includes injuries affecting sub-contractors and hired labour, has particularly seen increased claim sizes and rising premiums, while professional indemnity remains challenging.

Bovill Risk & Insurance Consultants Chief Executive Chris Bovill says material damage and liability premiums are rising, with some rate increases of up to 50% on the liability side. Worker-to-worker excesses are also increasing due to large losses on long-tail claims.

“Premiums are showing no sign of stabilising in the short-term as insurers are seeking to return to a profitable market,” Mr Bovill tells Insurance News.

He says many insurers are reducing design and construct professional indemnity capacity, with a number reducing maximum limits from $10 million to $5 million. Cladding exclusions are commonly applied, with varying levels of cover.

“Insurers that continue to offer terms for this profession have applied consistent premium rates over the last year within a 10% rate increase,” he says. “Though the actual premiums applied by different insurers are quite diverse, where one insurer can be multiples of the premium offered elsewhere for the same client.”

Insurers are paying closer attention to the type of projects and total project values than in previous years and are being more selective.

Rising worker-to-worker losses reflect legal system and workers’ compensation dynamics, multiple parties, the level of construction activity and the increasing use over years of third-party labour on sites.

Underwriting agency Mecon Insurance Chief Executive Glenn Ross says tort reforms dating from 2002 to curb an increase in bodily injury claims going through the courts have not prevented escalating issues in the current worker-to-worker environment.

“The situation hasn’t got any better; in fact it has got worse because compounding it you’ve got inflation and legal costs that have all increased over that period of time, so we are having a crunch again,” he tells Insurance News.

“Worker-to-worker claims are typically late-reported and the claim when we actually see it is far larger than it was when it was just a workers’ comp claim.”

Injured contractors or labour hire workers who receive payments through their employer’s workers’ compensation cover may also seek damages through the courts for negligence on the part of other companies at sites.

At the same time, workers’ compensation providers are also seeking to recover costs from parties found to be culpable.

Mr Ross says NSW compulsory third party (CTP) motor scheme reforms have addressed rising injury costs in that area, and wider change is needed. The CTP reforms introduced a no-fault scheme that keeps all but the most serious injuries out of courts.

“Construction sites are very dynamic places, the same as a road,” Mr Ross says. “There is a correlation between the two. Nobody goes out to deliberately cause a car accident, just as nobody deliberately sets out to injure anybody on a construction site. Yet there is always somebody looking to blame somebody else.”

Governments and regulators are focused at the moment on flammable cladding and building defects as they fix past failings and aim to restore confidence in new residential and commercial projects. Repercussions are still being felt after the fire at Melbourne’s Lacrosse apartment building and cracking at Sydney’s Opal Tower raised the alarm on wider problems.

NSW has introduced the Design and Building Practitioners Act and regulations and other measures to stop “dodgy builders and developers” and provide peace of mind for property buyers. The moves to lift standards have been broadly welcomed, but there are insurance impacts.

Changes include the requirement that a residential apartment builder must declare their work has been constructed in accordance with the Building Code of Australia, which Mr Ross points out effectively makes the builder a certifier, with ramifications for professional indemnity markets.

Requirements that builders should be “adequately insured” take effect from 2023, giving a two-year transition period, while an exemption is available in certain circumstances where cover can’t be found.

The Insurance Council of Australia (ICA) flagged concerns in a submission ahead of the regulations coming into force.

“We do not envisage the development of new insurance products which would cater to the certification process for a building by a builder,” CEO Andrew Hall said. “While builders’ warranty insurance covers this type of activity, it has not been successful or adequate in terms of the amount of compensation required.”

NSW has also introduced a 2% building bond for defects, and the state is looking at further reforms. An advisory panel will report early next year on decennial liability insurance to potentially cover new building defects for up to 10 years. The concept derives from the 1800s Napoleonic Civil Code of France and is used in a number of countries.

Agile Underwriting Services Head of Construction Simon Garske says decennial cover could change the dynamics of the construction insurance industry in Australia and the firm is closely watching developments.

“We understand one measure being contemplated, if decennial insurance is introduced, is removing the 2% bond,” Mr Garske tells Insurance News. “This could motivate developers and project managers to buy decennial insurance and increase confidence for people buying apartments off the plan.”

Victoria is also reviewing building regulations and has released a paper that discusses the potential for “project-based insurance”, which could include decennial liability or inherent defects insurance. A scheme in the UK operates on a no-fault basis where parties don’t have to prove negligence.

Agile, which has entered the construction market against the tide, is not participating initially on the liability side, given the challenging environment and with the industry grappling with worker-to-worker exposures. It is taking a careful approach to fully understand the risks it is covering.

Mr Garske, who has worked with Munich Re, Allied World and FM Global, says as a new player Agile is coming into the market at the perfect time, and believes that with a focus on responsible, technical underwriting it can participate profitably.

“The market was soft for more than 15 years, during which time rates continued to fall and policy covers became extremely broad,” he says. “That trend is being reversed and – given some underwriters have exited or continue to impose tighter guidelines on the business they’ll write – there is scope for additional capacity.”

The construction industry has benefitted from an Australian building boom and largely continued to operate amid the COVID-19 pandemic, but has still experienced its share of lockdown disruptions and other impacts that have driven up costs and caused project delays.

“Lockdowns, travel restrictions, access to domestic and overseas staff, longer lead times, and increased costs of materials all have a flow-on impact on insurance coverage,” Mr Garske says. “Some insurers won’t provide automatic extensions on delayed projects, particularly where a project exceeds original cost estimates.”

Marsh says COVID-19 and communicable disease exclusions are now the norm across construction. Cessation of work clauses, which provide cover in “tools down” situations, have also had time periods reduced.

Looking ahead, Agile says emerging construction issues include difficulty in finding cover for renewable energy construction projects, including solar farms and battery storage facilities.

“Some solar farms are in unsuitable locations and inadequately engineered; battery storage facilities are still prototypes and the fire risk needs to be better understood,” Mr Garske says. “Many battery storage plants have caught fire.”

Construction market conditions are expected to remain challenging for a while yet as insurers maintain caution in assessing Australian material damage and liability risks, but positive signs are emerging.

Willis Towers Watson’s Mr Drennan says a plateauing in rates is likely, first in material damage next year followed by other lines. This reflects insurers’ focus in moving toward the technical levels they have targeted.

“Our feeling across our portfolio is we are starting to see that mountain climbed.”