With the impact of a hard market being felt across the construction PI market it is worth considering why SIR levels might be on the rise. It is not just a case of insurers capitalising on challenging market conditions. There are other factors to consider.
Over the last 5 years, there has been a significant increase in the severity and frequency of claims within the construction PI sector and claim settlements are getting larger. The Lloyds of London thematic review would certainly support this view which outlined a number of consecutive quarters which were loss making. So why are claims becoming more expensive? What factors need to be considered?
- Liability outside of negligence – Cost overrun, delay and performance claims from contractors continue to be pushed down supply chains as they are often uninsured or irrecoverable elsewhere. The very onerous terms that have been imposed by clients means consultants often face contractual liability exposures even when they haven't themselves been directly negligent.
- Cost of rectification - the cost of rectifying a project will have increased from when the project was at bid stage. Post-Grenfell, cladding remediation schemes have been disproportionally increased in cost because of the consequential losses relating to decamping tenants and waking fire watches.
- Post event regulatory review - there may be a change or reinterpretation in regulation that requires a more expensive product to be used. This is a common issue with the concerns associated with defective cladding systems.
- Size and complexity of projects – SIR levels have not kept pace with the leap in typical contract values over the year's and with advancements in technology, the need for a sustainable build, coupled with social responsibilities, mean projects are becoming ever more complex. The costs in rectifying these have significantly increased.
The above factors have contributed to construction PI insurers making consecutive losses over the last 5-years. Whilst premiums rates have been rising significantly large claims continue to be settled so losses continue. The only way for Insurers to move back into profitability is to push more risk exposure back onto insured's – particularly in continuing problem areas such as cladding and fire safety.
Many insurers are expected to further impose increased self-insured excesses at forthcoming renewals. Electing to take a higher 'each claim' retention, or a capped aggregate limit may allow you to negotiate some premium relief before a higher level is “forced” on you.