26 April 2024
Construction Professional Indemnity Market Update H1 2024
The construction professional indemnity market has largely stabilised with many insurers showing a strong desire to maintain market share, although challenges remain from increased claim costs associated with remediating legacy cladding and fire safety risks. A combination of increased appetite and larger premium income budgets is evident with the increased competition leading to double-digit percentage rate reductions on well-performing risks.
Coverage restrictions
The market has now widely adopted the IUA Cladding and fire safety restricted coverage clauses, but many firms are continuing to have imposed increased levels of per-building retentions as the market seeks to minimise their exposure to new notifications arising from the BSA 2022 legislation changes. However, there is increased availability from most insurers of fire safety cover on an RDI basis for firms who have previously had an exclusion for both combustible cladding and fire safety (FS) related claims. Wherever coverage is provided, it remains restricted to a negligence trigger, a single aggregate limit, excludes consequential losses and is frequently subject to higher excesses applicable to each building at every site (per IUA 04 023).
Cyber exclusion
Regulators having identified Non-Affirmative Cyber coverage as a threat to insurer solvency, PI insurers are now mandating absolute cyber exclusions (IUA 04 017) in Construction PI policies, citing that they are seeing claims stemming from cyber events that they had neither underwritten nor charged for, thus creating unmeasured exposure within their portfolios. Firms should consider purchasing standalone cyber insurance to protect themselves from cyber events and not try to rely on their property and casualty policies for third-party cyber covers.
Rate changes
The rating environment improved in H2 2023 and has continued to do so in Q1 2024, with well-performing firms being able to secure meaningful rate reductions. Rate changes remain dependent on several factors including risk profile, claims activity and the volumes of cladding and fire safety-related notifications.
Increased competition especially for firms who are willing to take appropriate levels of self-insured retentions and in line with their turnover has resulted in more favourable renewal outcomes for such firms.
Market concerns
Contractor and supply chain insolvency has increased significantly because of rising inflation and is now one of the biggest concerns for the market as evidenced by the recent administration of firms such as Henry Construction and Buckingham Group Contracting. The 40% increase in the construction material price index since 2021, coupled with the fuel price inflation, is placing even greater financial strain on firms already operating on thin margins. This situation is likely to result in higher levels of insolvencies in the industry. There is an increased focus from insurers on a firm’s ability to manage these challenging conditions and on their ability to secure contractual protection against price inflation and ensure sufficient contingency in their contracts. Insurers are increasingly scrutinising a firm’s financial health and liquidity position, in addition to checking they are proactively reviewing the financial strength of their supply chain.
The introduction of the Building Safety Act. Notably, it extended the limitation period from 6 years to 30 years under s1 of the Defective Premises Act 1972, and section 38 of the Building Act 1984. As a result, firms have expanded the scope of their past project reviews to include all relevant buildings constructed or that underwent refurbishment works over the last 30 years. This has led to a further tranche of new precautionary notifications. In response to these new notifications, we saw insurers adopt a more critical view of Cladding and Fire Safety cover afforded by the market for projects undertaken or completed prior to changes in Building Regulations in December 2018. This has resulted in increased scrutiny by insurers on legacy projects and a requirement for firms to evidence the extent of past project reviews for all relevant buildings above 5 storeys/11m in height.
As a result of these and other factors including claims inflation and Modern Methods of Construction (MMC), the professional indemnity market has continued to drive a cautious, conservative approach to underwrite certain construction risks. MMC refers to the design, manufacture and pre-assembly of construction materials and components in a factory environment, prior to installation on site. Given the relatively new nature of these techniques, concerns are around the speed and quality of this work and the potential exposure to repetitive failures requiring rectification on a mass scale.
"Insurers are shifting their focus away from rate improvement... they are concentrating on achieving premium growth and deploying more capacity on well-performing individual risks."
Summary
The last 6 to 12 months have seen a marked improvement in market conditions compared to the previous 5 years, and we expect this trend to continue in the short term. For the first time since 2017, insurers are shifting their focus away from rate improvement. Instead, they are concentrating on achieving premium growth and deploying more capacity on well-performing individual risks. These signs are more symptomatic with softer market conditions, although rates remain at historic high levels. This more competitive rating environment has resulted in a number of firms experiencing reductions in their PI premiums, but the market still remains cautious towards cladding and fire safety-related exposures that continue to cast a shadow over the construction industry.
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