Following several years of hard markets, a cautious but optimistic view of the professional indemnity insurance market for the UK construction sector seems increasingly justified. Buyers of this cover have had to navigate four years of a hard market, with the greatest pinch in terms of premium spend and restrictions in cover experienced in 2019 and 2020. This has been further compounded by COVID-19 restrictions. More recently, insurers are maintaining a disciplined approach, with deployment of smaller line sizes and adequate ventilation through the programme tower. However, new capacity is starting to create a degree of competition.
The Construction Leadership Council (CLC) conducted a survey in 2021, looking at construction PII renewals. The survey was carried out from mid-February to mid-March and received 1,066 responses from a mixture of consultants, contractors and specialists. They ranged in size, half of the respondents being from companies with turnover below £2 million and 10% over £50 million. Those findings were unsurprising – but a key highlight was that premiums had increased nearly four-fold at their last renewal, having doubled the year before. In May 2022, that same annual survey stated that 42% of those taking part commented that their last PII renewal was “significantly worse” than the one that had gone before.
These results, while extremely useful, have to be seen in context. They will often give a view of a marketplace that is up to 12 months old, when we consider that those renewals will have occurred up to 12 months prior to May 2022. That said, we cannot ignore the facts – we aren't out of the woods yet.
Whilst acknowledging this cautious optimism, professional indemnity insurance for the construction sector remains challenging. However, there is a difference: whereas through 2018-2020, insurers were remediating their books and making considerable rate increases on a portfolio basis, risks are now being assessed on a much more individual basis. We're seeing a continued strong focus on claims experience, sectors of activity, geography, risk management (contract risk and supply chain risk) and corporate governance.
While rate increases currently stand at 5–10% for an average construction renewal, there are also signs that insurers are seeking to grow their portfolios where those risks can (amongst other attributes) demonstrate strong risk management philosophy and risk diversification. To that extent, we have achieved held premiums and flat rates, in some cases through Q2 and Q3. These examples are still relatively rare, and insurance buyers are having to work hard to differentiate their risk.
Overall, there still aren't any signs for insurers looking to broaden policy coverage. However, the landscape for cladding and fire safety cover has altered slightly. For those firms who have not historically been able to purchase the limited standard market cover for cladding and fire safety (negligence cover only, rectification costs only with consequential losses excluded, and aggregate only cover), there are now a handful of insurers who are willing to revisit this. Equipped with the right information (speak to your broker and insurer in order to ascertain exactly what is required), it is possible that insurers will now consider reinstating the limited standard market cover, but on a "retro-date inception" basis. This does start to provide a better position for firms who had experienced a blanket exclusionary position, with insurers perhaps looking to the changes to building regulations to assist in the underpinning of the full gamut of exposures borne out of high-risk residential buildings.
Those firms requiring “any one claim” cover continue to purchase higher aggregated limits of indemnity, relying on “round the clock” reinstatements seeking to emulate “any one claim” cover. The likelihood is that this programme structure is here to stay.
At the Q3 point of the insurance market year, from a claims point of view, the UK construction sector is still dominated by claims arising from the cladding and fire safety notifications that were predominantly made through 2018–2020. Indeed, the sector is also still dominated by those additional claims that have manifested from the original notifications, where the remediation works have exposed other defects. For those with a global footprint, the complexity of projects and escalation of raw material costs remain a recurrent theme. However, COVID-19 related claims remain few and far between for the construction sector.
The future claims environment will likely be influenced by the geopolitical and economic effects that are being reported on today, such as inflation, economic downturn, war in Ukraine, supply chain, regulation and climate emergency. Indeed, The Building Safety Act (BSA) and related developments that have been, or will be, coming into force in several phases since it received Royal Assent on 28 April 2022, are making changes in relation to what is required when designing and constructing buildings. These relate in particular to high-rise residential blocks and the introduction to changes to the regulation of construction professionals, the regulation of construction products, and the regime for remedying historic fire safety defects. It has been commented that some of these changes may very well increase the prospect of civil claims, regulatory action, or even criminal sanctions against construction professionals.
Coming back to the here and now, whilst Lloyds' of London's year end 2021 results posted a £2.3bn before tax profit after posting a loss for year-end 2020, we need to approach this next stage of the market with cautious optimism. Underwriters look to accept risk but with a sustained approach, being alive to the seemingly ever-rising costs of defending an alleged negligent professional delivery, or where professional advice is scrutinised to a greater degree. Both of these factors have arisen due to the uncertain economic and regulatory environment – not to mention the turbulent political world that we experience today.
As ever, early engagement with your insurer and broker is key, as is effective and clear issuance of information. Proceed with caution to renewal, but this time around we can adopt a cautioned optimism for most.