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Premiums are going up, deductibles are increasing, and coverage enhancements are more difficult to achieve.
Quality of underwriting submissions is essential as underwriters seek to understand client risk before committing capital.
Having a broker market the insured's business to the insurer provides a distinct advantage. Underwriters are ignoring or declining submissions they don't understand.
A combination of major and attritional losses and market withdrawals has reshaped the Australian and global construction insurance market so there is less tolerance for perceived risk across all sectors and businesses must be meticulous in detailing their exposures.
Since the last quarter of 2018 the Australian construction market has transitioned from stability and consistency to a market that is hardening at some pace. This is partly driven by a number of London insurers exiting construction or scaling back their offerings, reducing available capacity, as well as local insurers redefining their risk appetite as a result of year-on-year losses. It’s fair to say that insurers are no longer chasing premium, they are trying to avoid losses.
The past year recorded many losses from mechanical failures, fires and natural catastrophes. A dam collapse in Colombia, estimated to cost more than $1.2 billion, may prove to be the largest construction loss in history The construction sector has for many years faced increased volatility, yet prices were still declining and broad coverage was generally available. This imbalance generated the inevitable correction we are seeing now.
"The construction sector has for many years faced increased volatility, yet prices were still declining and broad coverage was generally available."
On first view, the recent decision in the Lacrosse Tower judgement, whereby the judge found no evidence that the builder failed to take reasonable care in installing the cladding, seems significant for the relationship between owners, builders and consultants.
For a construction insurance placement today, the insured's perceived risk exposure and their past history dictate market response. Insurers are now differentiating between contractors on the same project, where they perceive differing qualities of risk management, and in some cases not offering coverage for some contractors they consider to have a poor claims record.
Professional indemnity cover remains challenging for both annuals and project-specific covers alike, due to high claims activity in the construction sector.
Insurers are being more careful about particular risks and how much capacity they are prepared to offer.
Liability is less affected by the prevalent market conditions than other construction classes. In order to better manage their books, some previously leading primary liability markets are now being more circumspect about writing primary construction liability business.
"Professional indemnity cover remains challenging for both annuals and project-specific covers alike."
Contractors and subcontractors with good claims records remain attractive propositions to liability insurers, however, primary liability insurers’ books are subject to profitability issues due to worker-to-worker claims or workers’ compensation subrogation actions, which may be lodged many years after the incident. Understanding the incurred but not reported (IBNR) history is a must. Five-year claims history is no longer sufficient – seven years is a minimum.
In summary, construction is a long-tail business. Today’s losses come from projects or annual policies written several years ago, and consequently it will take insurers some time to return their books to the black. For construction businesses this means insurers now want more risk information than ever before, high quality underwriting submissions and a focused marketing campaign rather than a ‘send to all’ approach. These are essential in order to achieve the most favourable terms.
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Head of Construction – Australia and Asia
T: (02) 9242 2035
M: 0424 005 448