For the first time since 2017, the global construction industry outlook has shifted into decline in the wake of COVID-19. National construction activity is following a similar trajectory, after a 3% decline in December 2019, and a drop of 0.7% in the June 2020 quarter. Fortunately, the Federal Government’s Jobkeeper and Jobseeker programs have assisted many employers in retaining workers and sustaining business operations, as has the classification of construction as an essential service.
As we enter Q2 of FY21, we’ve summarised how the present conditions are impacting the insurance market for members of the construction industry.
Contract Works – Material Damage
- Many local insurers have been reviewing their rating models, with knock-on effects to premiums and deductibles. In addition, many have reduced capacity to insure – i.e. where we would normally expect an insurer to insure a risk / builder / project to the value of $100,000,000, we’re now seeing many revert back to a multi-insurer approach, whereby several companies share the risk.
- Insurers are also closely reviewing the Limits of Liability and sub-limits due to meaningful absences of local capacity.
We believe the above has been brought about by last summer’s unprecedented bushfire season, and the North QLD floods of 2019. Both events have resulted in depleted pools of reinsurance, often making insurance unprofitable for carriers. This is commonly referred to as insurers’ realisation of losses.
- Previously available coverage enhancements such as Design Exclusion write-backs (LEG3 or DE5) are either seeing a minimum of 30-40% rating increases or scaled back to DE4 reduced coverage, or not offered at all. Following this, we are seeing a large adjustment in DE5 deductibles where insurers would previously have offered coverage and deductibles at a minimum of $100,000. This has been lifted to $150,000-$250,000 due to the breadth of coverage it provides and the complex nature of attritional losses.
- Contractors with poor loss history and exposure to weather events are experiencing imposed revised deductibles for separate major perils and water damage excesses.
The Lloyd’s of London market has continued to experience change following the Lloyd’s Review
(DECILE 10) and the exit of many construction insurers – where previously they were also providing support to Australian underwriting agencies. Those which remain are increasing minimum rates, securing policy limits and offering higher deductibles.
Early engagement is key to insurance success
Insurers, brokers and contractors must work together in the short to medium term, with early engagement critical to help protect each contractor’s capital position/s and future plans for growth. Working together in a tripartite partnership capacity is essential to avoiding bill shock.
Construction Liability & Completed Operations
The current situation has seen insurers continue to closely scrutinise their underwriting results across all classes of casualty programs. Insurers have set their sights on underwriting profitability (vs gross written premium) and the investment income is being treated as a ‘nice to have’ and relegated as a priority. We have observed similar responses from insurers based in Singapore as well as Lloyd’s of London. Consequently, we are seeing sharp increases in policy excesses and renewal rates on prior years.
Greater insurer scrutiny and changes to the classification of business that should be written has influenced the costs and restrictions imposed by reinsurance arrangements, meaning:
- Insurers are seeking to increase rates where claims have been poor or where currently underpriced, or looking to scale back offered policy limits. The increase is between 10-25% on well performing accounts.
- Insurers are requesting much more information around operations to ensure they fully understand the risks and exposures and price accordingly. If information cannot be obtained or is ignored by contractors, insurers are likely to restrict coverage or exclude certain parts altogether.
Work on bridges, piers, jetties, harbours, defence, civil contractors/earthmoving, and heavy industry are currently considered more susceptible to “long-tail” losses. Insurers are steering away from these risks, which are seen as unprofitable (due to WorkCover recoveries).
Sub-contractor injury or sub-contractor caused property damage deductibles are likely to continue increasing to minimum levels of $50,000 with some seeking up to $250,000 (depending on the industry). Insurers are being selective and treating each risk on their own merits. Options are available for excess buy-down on a standalone product.
An increase to the policy excess can alleviate premium increases. In some events however, the premium reductions are not proportionate to the increase in excess.
Worker to Worker claims continue to be the focus of Construction Liability underwriters
Now more than ever, contractor personal injury claims are being brought on by recovery actions from WorkCover and state-based workers compensation insurers (given the long-tail nature and statute of limitations, which can be up to 7 years). As a result, Worker to Worker deductibles offered by insurers and/or cover is being offered at a minimum deductible level of $50,000 and we are seeing insurers requesting claims data for up to 10 years to analyse trends before writing new business.
We’re With You All The Way
It’s important to be aware of these changes and how they are impacting new and existing insurance policies. As a general rule, it’s best to engage with your broker early to limit bill shock and seek the most appropriate cover for your needs. We encourage you to contact your Honan insurance advisor to discuss your situation and address any questions or concerns.
Head of Client Service (QLD) – Corporate Insurance & Risk Solutions