21 November 2024
Construction Insurance Market Update H2 2024
The UK and international construction markets, which Gallagher accesses for construction risks, have continued to stabilise over the last 6 months, with increased focus from markets on building a sustainable construction portfolio for the long term. There continues to be adequate appetite for major international construction risks, coupled with an element of caution as rates begin to plateau and, in some sectors, there is a view of the market beginning to soften. There remains some high-value claims activity, ensuring continued caution amongst insurers, in the short term stifling the return to significant profitability for the established players who have endured the previous soft market.
Underwriting capacity remains stable, although in some cases it comes under pressure to meet the demands and increasing frequency of mega construction projects, along with their increasing contract values. There has been some shift in the insurer talent pool as many insurers seek to prepare themselves for the future, with many also looking at optimistic new business targets into 2025. There have been a limited number of new entrants to the market, but mainly offering follow market capacity. As a consequence, this has not significantly influenced the market in the major projects sector, although we are seeing some oversubscription of the most favourable risks. Consequently, we are seeing some of the larger established insurance companies deploy more of their available capacity to maintain market share.
Coverage
Coverage remains consistent, and there is continued caution from markets to deviate from their core product offerings. Recent US legal cases regarding design and defects coverage have led to increased focus on this aspect of cover, with many markets seeking wording deviations specifically in relation to how coverage should apply to concrete and in relation to the definition of damage. The London Engineering Group (LEG) has also released a proposed revised piling clause to address the perceived evolution of this aspect of the industry.
Rating
Rating has again remained consistent over the last 6 months; however, there has been some downward pressure on markets to retain annual contractor business that has been retendered, with some UK accounts seeing savings in the region of 20%. As markets begin to deploy more of their existing capacity, creating potential oversubscription of placements, there is less deviation in follow market terms needing to be aligned in the placement process.
NatCat (Earthquake/Windstorm) pricing (critical for many of our international risks) has remained static. Whilst the US Gulf Coast windstorm season was predicted to be one of the most active on record, and despite the effects of Milton and Helene making landfall as major category hurricanes, to date, this has been below modelled expectations. The final outcome of this will be the biggest determining factor of future terms and capacity deployment.
The focus for insurers continues to be on non-modelled secondary perils (hail, flood, tornado), which have been the main cause of recent significant losses in previously perceived relatively benign territories. Recent losses in the UAE, with hail affecting solar PV projects and the consequences of the April floods, have brought this to the forefront of the construction market, where the Middle East continues to be a significant source of construction business.
Market concerns
There remains reluctance from the treaty market to offer increases in reinsurance capacity for insurers or capacity for significant new lead market start-ups. This, coupled with optimistic new business targets, potentially means many insurers may resort to greater risk retention. Due to limited tangible profitability to date, it is unlikely that significant market softening will occur in the short term. There remain a number of concerns tempering immediate change in market direction:
- Social and economic inflation affecting project values and the adequacy of deductibles on multi-year project policies
- Political tensions in Eastern Europe and the Middle East
- The continuation of unmodelled weather events, specifically in Europe and the Middle East
- Challenges aligned to the evolution of modern methods of construction, hybrid schemes, and the repurposing of historic existing structures
Summary
The construction market has now seen a strong period of stability, but high levels of significant tangible profitability, improving the position from the last soft market, are yet to be fully realised by many insurers. Whilst we’re coming to the tail end of an active named windstorm season, we believe that most losses have been within insurers’ modelled expectations and therefore do not expect significant upward pressure on NatCat pricing through the 1/1 property treaty renewal season. At the same time, some downward pressure on general (non-NatCat) construction rates may be expected in the new year if the stabilising construction market attracts established insurers to add construction as a product line to their existing portfolio. UK risks are not subject to the same NatCat exposures, and the CAR market is showing clear signs of a softening landscape with significant savings being achieved on long-term annual accounts.
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Casualty construction insurance update
Since our H1 2024 update, whilst insurers would prefer to stay on top of the mountain, the signs are that the descent has well and truly started. Whilst some insurers are facing internal pressures to enhance costs and efficiencies, the targets for new business continue to grow.
Consequently, the remarketing of annual contractors’ accounts is met with much vigour and competition. Long-term agreements are making a comeback, typically on a flat rate basis, but it is likely that it won’t be too long before discounts are offered as insurers compete to win new accounts. Insurers are keen to secure risks for as long as possible, particularly those with an exemplary claims record. As we approach 2025, claims cost inflation will continue to have an impact, and retention will become more important. Reinsurers are seeking to impose some new restrictions with regards to exposure to PFAS (Per- and polyfluoroalkyl substances), so collection of this data will need to be managed carefully to minimise any restrictions on cover.
For projects, rating remains buoyant, and the lack of large building and civil projects will only help to drive more competition. As mentioned previously, there is no let-up in the rate of insolvencies, so instalment premiums may become more of a concern.
In the international casualty market, new entrants and the expansion of existing teams have driven more competition in that area. Whilst the domestic markets may be more competitive in some territories, London continues to prove its worth as clients turn to the Lloyd’s of London market for consistency and longevity over domestic rivals. Caution is still advised for certain types of projects, such as high-rise residential and refurbishments where third-party water damage claims are prevalent. Additionally, risks in territories with bushfire exposure are treated with significant caution.
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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.