With changing rates, changes to cover and concerns about lack of future capacity, the construction professional indemnity insurance (PI) market is currently going through its most profound change in over a decade.
Concerned about how this might affect your business and insurance premium? We interviewed two of the leading figures in the PI market to get their views on this evolving and increasingly challenging market. Read our Q&A session with Charles Manchester from Manchester Underwriting and George Smeaton from Starr Underwriting for how construction firms can best prepare themselves in this current market.
- In your opinion, what is the most effective way that a business can stand out with their presentation in the current market?
Manchester Underwriting: The presentation needs to be fair and proportionate to the scale of the business. A sloppy, partially completed proposal form that omits lots of information gives a clear message. Likewise, a brief “short” proposal form for a large, multi-disciplinary practice gives the message that risk isn't taken seriously, whilst War & Peace for a straightforward micro-SME consultancy is off-putting. Standing out is not necessarily a good thing. Looking professional is.
Starr Underwriting: Risk management procedures are increasingly central to our decision making so working with your broker to clearly present the procedures and policies you have to monitor and manage the risks your business faces will help you stand out. If you've had claims in the past make sure you provide a full assessment of what went wrong and what you've done to stop it happening again; “it wasn't our fault” isn't a good excuse. If you can meet your insurer to allow them to delve a little deeper into these issues it will help even more.
- What types of businesses are giving you the largest underwriting challenges currently?
Manchester Underwriting: We mainly operate in the SME space. For these firms, the risks that present the most challenge are those operating in the heaviest areas but with modest revenue, meaning that they just can't afford proper cover; one wonders whether they can afford to manage their risk. There are also those with multiple claims and modest scale – I think that these businesses are nigh on uninsurable. Finally, there is the issue of fire, whether combustibility of cladding, internal doors or compartmentation etc. I believe there has been a systemic failure to take fire safety seriously, encompassing everybody involved, so it is hard to justify our capital providers paying for what could grow into a systemic industry-wide issue.
Starr Underwriting: High risk areas of work such as cladding, basements, waste to energy projects and stadiums have led to well publicised and high value claims for PI insurers, these are clearly challenging sectors. We have also seen issues with firms undertaking projects overseas without having a full understanding of the territory they're working in. More generally, where we insure lead contractors we are finding it increasingly difficult to recover losses caused by sub-consultants so selecting firms who have the right procedures and controls for selecting and contracting with sub-consultants is a real focus area.
- What are some of the emerging risks that insurers face when underwriting a construction firm currently?
Manchester Underwriting: Mainly fire safety, as explained above. And if the industry has been so lax with fire safety, what else might come next?
Starr Underwriting: Although cladding has been in the headlines since the Grenfell tragedy, we are increasingly concerned with broader issues involving fire safety. We have concerns about the use of desktop studies to comply with building regulations where these were not suitable; a lack of over-arching fire safety strategy on projects; and the use of building materials that do not meet the appropriate standards.
The uncertainty around Brexit is also on underwriters minds. A “no-deal” scenario could lead to delays moving materials into and out of the country, or an economic downturn could negatively impact construction firms.
- What do you look for as far as good risk management in a construction firm?
Manchester Underwriting: A historical approach of staying out of trouble – not just avoiding claims but operating in a way that tackles the issues raised above so as not to have such issues to deal with now.
Starr Underwriting: Each firm will take a slightly different approach to risk management – there isn't a “one-size fits-all” approach to good risk practices. We are looking for firms who have clear policies that are regularly reviewed to deal with new risks and can demonstrate that the procedures are embraced across their whole business; just having a policy isn't enough if your employees don't follow it.
There are however some key features that we would hope to see around client selection, contracting terms and sub-consultant appointments. Starr have created a new risk management questionnaire to help firms highlight their policies in these areas.
- How do you think the existing market is affecting renewal timeframes and when should firms start engaging with their broker and underwriter?
Manchester Underwriting: The market is moving all the time. Some insurers will run out of capacity soon. I think that companies should be preparing their presentation and consulting with their broker some three months or so before renewal and brokers should start discussions with insurers at least 6 weeks before.
Starr Underwriting: Early engagement is more important than ever. The current market conditions and requirement for extra underwriting scrutiny mean negotiating renewal terms is taking an increasingly long time. Firms should leave themselves plenty of time to put together the extra information underwriters require. I would suggest engaging with your broker at least 3 months before your renewal.
- What is your view of the current construction insurance market?
Manchester Underwriting: My view of the current construction insurance market is that it is both hard and limited.
Starr Underwriting: The market has been in a soft cycle for a long period and we are now seeing an overdue correction triggered by losses arising from cladding and the other areas mentioned above. The contraction in cover, increase in rates and reduction in the markets offering cover is typical of this stage of the insurance cycle.
- Do you think the construction market is going to get even harder for firms to find insurance?
Manchester Underwriting: Yes, I believe it will.
Starr Underwriting: I do not see the current market conditions easing before the end of this year and would not be surprised if the hardening continue to accelerate. The sector remains a challenging one for insurers and I expect the hard market to continue for the foreseeable future. Firms should expect to pay more for their insurance, with stricter terms.
- What has changed at MUM with regards to appetite in the last 6 months?
Manchester Underwriting: MUM's appetite is relatively unchanged but probably appears from the outside to have got broader. In principle, we have always been willing to write contractors or heavier risks, it's just that market pricing and terms had reached such ridiculous levels that we saw no point in quoting anything other than the simplest and best risks. Market pricing is not yet at optimal levels but it's a whole lot better than it was so we're finding that our terms are now nearer the mark. We have very high quality security and will not run out of capacity.
Starr Underwriting: Starr's overall appetite for construction risks has not changed but we are being more cautious about the limits we are willing to deploy on any one programme. We are taking more time to get to know our firms and are only looking to insure those that can demonstrate good risk management cultures ingrained throughout their companies.
- What type of firms do you still want underwrite?
Manchester Underwriting: We write almost all businesses in the construction industry. We're not interested in those specialising in energy, massive projects or with highly active claims experience. We quote very few cladders but occasionally see one that attracts us.
Starr Underwriting: In addition to what we've touched on above, we're interested in firms that take their risks and risk management programmes seriously, and are open and honest with their insurer and underwriters.
- What do you think the future holds for the Construction PI market?
Manchester Underwriting: I think that there will be further hardening and then an equilibrium will be reached for a while. There will be more layering and subscription for the heavier and larger risks as insurers' line sizes are moderated. I suspect that some more of the worst performing insurers and MGAs will drop out. Inevitably, rates will fall off at some point but I don't see that in the medium term.
Starr Underwriting: I believe the market will continue to harden, and the better presented the firms are, the better positioned they are to face these challenges ahead.
If you have any questions or would like further advices, please contact your Lockton representative or call +44 (0)33 0678 0962 to speak to one of the team directly. Our team can discuss the changing PI market with you in detail, provide pragmatic advice regarding any claims and/or circumstance notifications, and help you secure the best possible outcome at your next renewal.