30 May 2024
Construction Insurance Market Update H1 2024
Risk appetite amongst the UK and international construction markets has stabilised and remains consistent, although each insurer’s underwriting approach has emerged from the hard market as generally more defined and less flexible than previously.
In 2024, construction insurers are not under pressure to significantly increase market share and this is unlikely to influence any downward rating trends. Instead their focus remains on client retention and risk quality to maintain sustainability.
Sector-specific challenges continue to exist but there remains loyalty from insurers to existing clients especially where they are involved in multiple classes of business or across a large portfolio.
ESG credentials will continue to influence the underwriting appetite of many insurers, with greater scrutiny being placed further down the supply chain, which may further limit the pool of lead underwriters on specific projects.
Currently, there is no new significant lead capacity entering the UK or international insurance market. However, the recent entrance of new follow market capacity suggests a change in direction for the market. Significant new lead capacity entering the market in 2024 would likely be the biggest softening influence on a currently stable construction insurance market so we are in close contact with all key construction insurers and following developments with interest.
Save your copy of the update
Insurance Update
The UK construction market has continued to undergo a period of transition over several years from soft market conditions to a sustained period of hardening, and most recently with rates beginning to plateau for all but the most challenging risks. Annual policies have now had several years of improved market terms and conditions. Many project-specific policies placed on softer marketing terms have now finally reached handover. Generally, the legacy of terms and conditions from several years ago continues to decline, assisting with improving underwriter results over the last couple of years and has brought an element of stability to the construction insurance market.
In consequence of the above stability in trading conditions, the most recent developments include the entry of new follow market capacity. While this development is unlikely to directly drive more commercial lead terms, it is likely to enable easier completion of terms and seems to signify a change of direction in market conditions. This is all dependant, of course, on the way in which the new entrants agree to deploy their capital, but early signs are good for construction insurance buyers.
Lead underwriting capacity remains consistent, with no new lead markets emerging and no withdrawals from the class. Underwriting remains disciplined and focused on core product offerings and the retention of profitable renewable business. MGA capacity remains active and an important aspect of the UK insurance market and has been successful in providing a solution for smaller-value, high-frequency risks. There continues to be loss frequency, but, conversely to previous years, in most cases, this has been absorbed within underwriters’ modelled expectations. Inflation remains a concern for insurers, as many claims far exceed the original build costs incurred at the inception of the project.
Gallagher Specialty’s Construction team, based in London, transacts both project and annual open cover insurance placements worldwide, utilising global insurance markets based both in the UK and internationally to obtain the optimal terms for our clients. Closest to home are the European insurance markets for international projects; these are closely aligned to the UK insurance landscape and have followed an almost identical trend in underwriting appetite, capacity, and response to a transitioning marketplace. These UK and European insurers concentrate on construction globally, which has allowed them to remain focused on territories where construction development continues, despite the economic downturn in some geographic areas. This consistent approach has seen a number of mid-term project placements enter the market from other regions where domestic markets are either unable (largely due to project value increases) or are not obliged to extend project periods.
Internationally focused insurance markets continue to consider the full cross-section of construction projects but remain cautious in respect of those projects in high- natural catastrophe (Nat Cat) regions (Earthquake/Named Windstorm/Convective storm), as many insurers have more restrictive treaty reinsurance capacity in these areas. Insurers have also seen higher levels of extreme weather events, as evidenced by annual insured losses from Nat Cat surpassing USD100 billion in 2023 for the sixth year in a row. Climate change and how it has been accounted for in the project design remains a hot topic in this regard. Underwriting remains disciplined and focused on core product offerings. MGA capacity remains active and plays an important role in small to medium-sized projects and in a supporting role on larger projects.
Coverage
The scope of coverage for UK projects and annual covers remains consistent. There is no significant appetite from insurers to deviate from the traditional core CAR coverages. There remains increased focus on high-rise buildings from a fire and water damage perspective, and cladding remains a key consideration, with insurers tailoring applicable exclusions or declining to offer coverage for certain materials. A shift in focus to develop and re-purpose existing buildings has created a greater number of these risks coming to the market. In these cases, underwriters continue to focus on tailoring the breadth of coverage, price, and deductibles for existing building exposures, specifically those of a historic nature.
Prefabricated modular construction has continued to increase, and while this provides logistical benefits to projects, underwriters are cognisant of the potential for a wider systemic defect exposure. In the absence of good quality underwriting information, there is the potential for the imposition of series loss clauses and potentially higher deductible levels.
The increased use of structural timber and cross-laminated timber in isolation and/or integrated into many hybrid schemes continues to influence rating, coverage, and market capacity. There is greater scrutiny of detailed project information and loss mitigation measures. Early engagement of the project design/management team with insurers is fundamental to achieving the best coverage outcomes.
Recent legislation changes in the building safety regulations requiring further certification prior to handover will again be a further consideration in relation to the defined period of construction coverage and the transition from construction to property coverage and will require due consideration going forward. Geopolitics dominates the international landscape. Many insurers already had concerns regarding Strike, Riot and Civil Commotion (SRCC), which has seen many insurers move from a silent (full limit) basis to sublimited cover as concerns rise over the cost-of-living crises in many countries and regional activity in many developing areas of tension and conflict. Insurers offering delay in start-up insurance are also keeping a close watch on the supply chain impact of the activities within the Gulf of Aden or the tragic Francis Scott Key bridge collapse in Baltimore, USA.
Flowing from insurers’ concerns regarding escalating claims costs, extensions for claims assistance payments such as ‘Claims Preparation Costs’ are certainly being scaled back in many cases, at least being tailored to the size of any potential claim.
Rating
Ratings have stabilised and remained consistent over the last 12 months, with no significant signs of rate reductions, largely due to limited competition between the relatively small pool of recognised lead insurers. The continued focus has been more on risk selection and maintaining underwriting discipline on coverage and deductible levels. Insurers wishing to maintain profitable long-term annual accounts should ultimately come under pricing pressures for those clients who are able to demonstrate a strong risk management ethos, positive long-term loss experience, or are able to adopt higher self-insured retention levels.
Ratings for large, complex, single projects continue to be driven by the required insurance capacity. There is still a degree of fragmentation in underwriting strategy, with many subscribing underwriters seeking to secure close to their required terms and not simply deploying capacity to follow a lead insurer’s terms. Lead insurers are generally offering smaller lead participations than they had been historically, meaning a larger number of insurers are required to secure 100% of the placement and, when reviewing an array of lead quotations, there needs to be careful considerations made in relation to the completion strategy. This dynamic completion process also creates additional time for concluding any complex placement with multiple carriers.
Market Concerns
Many of the UK construction insurance markets are active in the international property/construction sector and write a global portfolio, so in many cases, their underwriting appetite and results are not solely influenced by the UK construction sector. As part of a wider property portfolio, the performance of operational property risks and the availability of treaty capacity will ultimately have an influence. The following key factors remain both a UK and international concern for many insurers:
- Rising inflation is affecting claims value, capacity deployment, and the adequacy of deductibles, especially for multi-year project policies
- Supply chain insolvency and recent contractor administrations
- Legacy project policy extension provisions, where terms and conditions were significantly more generous than current underwriting guidelines
- Frequency of escape of water claims and the insureds’ approach to this risk
- Potential for extreme weather events in the UK and globally, causing unexpected or more significant damage than modelled
- New emerging risks; cyber, civil unrest due to the cost-of-living crisis, and the potential for unforeseen losses on sites as a consequence of the energy transition
- Ongoing ESG considerations and building legislation changes
- Modern methods of construction and other emerging risks
Casualty Construction Insurance Update
The casualty construction insurance market has followed the same trend and has been in a state of transition over the last few years. After a decade’s worth of rate reductions, the last few years have seen continuous annual rate increases year on year at an average of 10%. Brexit and the COVID-19 pandemic were the major factors behind this uplift, although in essence, the market generally needed some kind of correction in order to improve underwriting margins. Some large losses in the UK have contributed to this uplift in certain sectors, particularly refurbishments.
We would highlight key points as:
- Annual rate increases appear to have stayed fairly consistent over the last 12 months. However, indicators are showing that rates are levelling off on annual business and markets are able to consider Long Term Agreements again which have benefits for the client as they can lock in their premiums for the next three years.
- Achieving flat rate renewals is a becoming less of a challenge even when exposure has increased or remained the same. We are still carrying out plenty of remarketing exercises, sometimes demonstrating that the current insurer is offering the best terms, but equally, this opens up opportunities for new markets, especially where they can leverage other lines of business.
- Underwriters have less autonomy as they need to seek senior management sign-off on certain elements. These stringent guidelines are reflected in certain elements of coverage being cut back in the form of sub-limits or excluded altogether (e.g., GDPR).
- Due to increasing claims costs caused by inflation, underwriters are requiring clients to retain more of the risk than in previous years (i.e., higher excesses, self –insured retentions, etc.).
- Market movement on the underwriters’ side has created additional lead capacity which will add to the competition although this is for international business rather than UK.
- Whilst the UK has slowed down in terms of projects, we have seen a marked uptick for business on the international side particularly in the Middle East. Energy from Waste is also a sector where we have seen stiff competition from the small selection of markets that write it.
- There has been a renewed focus on premium payment due to a number of high-profile construction companies going bust and lengthy instalment plans on projects may be scrutinised more closely.
Any discounts or agreements with competitive terms and conditions now largely come down to relationships.
The casualty construction insurance market is still competitive for sought after business. However, with the pressures on many types of business expenses being impacted by increasing inflation, the market will have no option but to start easing up on rate increases. As the uptick in rating is usually out of sync with the economic environment, unless this is addressed, clients will be forced to reduce their coverage or buy lower limits to save money. Time and effort dedicated to the collation of meaningful underwriting information will pay dividends in both the short and long term. We recommend that our clients engage with us and their insurers and discuss the long-term outlook with them as we seek to nurture productive partner relationships that will bring consistent benefits in the years to come.
Let's talk
Arthur J. Gallagher (UK) Limited is authorised and regulated by the Financial Conduct Authority. Registered Office: The Walbrook Building, 25 Walbrook, London EC4N 8AW. Registered in England and Wales. Company Number: 119013.