Professional Indemnity...
The Construction Sector Crisis OCTOBER 2019
M A N A G I N G R I S K , P R OT E C T I N G W E A LT H , E N G A G I N G P E O P L E
The UK Professional Indemnity market continues to present serious challenges for businesses and individuals in the construction sector. Whatever your profession – architect, surveyor, contractor, inspector – the availability of viable PI Insurance is becoming more difficult. Gone are the halcyon days of excess capacity and strong market competition – the “hard market” is here for Construction PI and looks set to stay for the immediate future. The past 12 months have seen a significant reduction in capacity and increase in premiums across the sector.
So what’s driving this change in focus? Grenfell & Cladding The tragic Grenfell incident has been noted as the leading factor in hardening rates in the PI market. There is no question that this incident has caused serious concern amongst insurers, but the market was already suffering from years of underrating. Whilst not exclusively responsible, the Grenfell fire has driven many insurers out of the market, reducing capacity and competition. Furthermore, those insurers that remain are reviewing their cladding risks and restricting cover or imposing terms to reduce their exposure. Often, this is leaving many businesses in the sector unable to meet their contractual obligations.
The Lloyd’s Impact The 2018 Lloyd’s of London review highlighted that UK Professional Indemnity Insurance has been operating as the second least profitable class of business underwritten in this market and has been unprofitable for a number of years. Following this review, Lloyd’s advised they would be taking a much tougher stance on loss-making syndicates, forcing them to quickly amend their stance on Professional Indemnity cover and rating with a view to making this class profitable once again. Whilst some syndicates have continued in the market, albeit with a need to drive increase in premiums and restrictions in cover, several major Lloyds Syndicates have withdrawn from the market altogether. This reduction in capacity is reducing competition and the impacting pressure on premiums this naturally brings.
Changing Face of Construction With more complex and large-scale projects commonplace, the advancing technology of construction methods are presenting new challenges to insurers. Underwriters are therefore having to take a much more detailed review of activities to ensure they fully understand the risk exposures they are accepting. This of course takes time, leading to delays in the underwriting process. With these increased exposures, there is a need to increase premiums. Furthermore, these large scale contracts often present more challenging contracts and a wider base of demanding stakeholders, all increasing the possibility of claims. Whilst individual contractor roles may be “small” in terms of fee income, the impact of the consequences of that involvement and the costs arising as a result could be significant. Underwriters will consider this closely, with premiums reflecting the risk, not the fee income.
Increasing Claims Of course, the historical underwriting losses noted above are driven by years of underrating premiums and increasing claims. We are certainly witnessing more claims notifications and it could be suggested that with the PI market challenges being well known across the construction sector, many are taking the opportunity to get claims noted now, whilst the cover is there. This rush to notify is further worsening insurers losses in this market, compounding the challenges in the market.
Where are we now? The impact in the construction sector is significant, with many businesses being unable to source equitable insurance cover, or in some cases not at all:
Approved Inspectors are particularly struggling, with requirements from The Ministry of Housing, Community & Local Government (MHCLG) being unavailable in the open market. In recent weeks, Aedis Regulatory Services has filed for liquidation after failing to secure Professional Indemnity Insurance.
The Association of Consultant Approved Inspectors (ACAI), the body which represents the majority of the UK’s private Approved Inspectors (AIs) and almost half of the building control industry, has called on Housing Secretary Robert Jenrick MP to urgently review the government-regulated AI Scheme of Insurance to prevent major disruption to construction projects across the UK. As yet, no changes have been made.
According to ACIA, there are currently three AIs responsible for more than 5% of live UK construction projects who have ceased trading. By the end of October 2019, 15 in total will have been forced to stop work because of Government inaction – representing more than 15% of all live projects.
According to the Construction Enquirer, concerned companies have contacted the publication in a bid to highlight the problem. One piling firm’s premium increased over 150%, with the company suggesting they no longer want to work in the piling market – one of the main reasons is the issue of getting insurance.
The publication also spoke to a roofing specialist that was struggling to get PI insurance to meet its customers’ needs. Major contractors demand £5m of cover, but it is unable to secure more than £2m. It fears that it won’t be able to take on new work without this and some insurance industry insiders have suggested that the market may run out of capacity in the latter part of 2019.
Many insurers are seeking to reduce their exposures by reducing the cover provided, offering Aggregate indemnity limits where Any One Claim has previously been provided, limiting cover by including costs/expenses in the indemnity limit rather than in addition, or increasing excesses. Insurers behaviour is evidently becoming more challenging around claims.
How can we help you? Insurers have very much changed their stance from the “soft market” days, with many closed to negotiating and terms being provided on a “take it or leave it” basis. Here are steps you can take to help secure the right cover at economical premiums:
Start Early Insurers are reviewing risks in great detail and with the rush for cover, give yourself sufficient time to prepare your renewal information. You may need time to notify your customers of changes in available cover too, and agree with them before renewal is taken. Give as much detail as you can up front – this will save time later.
Set Your Business Apart A proposal form only tells so much about you. Take time to prepare a pack on what is special about your business. Be clear about your risk management processes and how you mitigate risks.
Give Plentiful Claims Information What, how and what remedial action has been taken to prevent re-occurrence. Be prepared for premium increase and consider premium financing to support this.
Understand Your Consultants Your sub-consultants and subcontractors Professional Indemnity cover may change at renewal. Your policy may include a condition that stipulates such a professional carry at least the same limit of indemnity as the policyholder. Thorough and regular auditing of consultants, sub-consultants and subcontractors cover will ensure compliance with policy conditions and act as a strong risk management procedure for you. With all of these challenges, it should be remembered that premiums have been “falsely” low for a number of years and the need to redress is caused by years of underpricing in the market. This is of little comfort to firms historically used to low premiums, now facing significant increases in insurance premiums or limitations in their cover.
As the largest independent Insurance Brokers in Wales, Thomas Carroll enjoy access to a wide range of specialist Professional Indemnity insurers to help our clients through this challenging time. To talk to our experts, please contact hello@thomas-carroll.co.uk or call us today on 02920 853788