How things can change in the space of a few months. Despite the backdrop of a poor 2017 for insurers, until September / October 2018 the Construction All Risks (CAR) and Third Party Liability (TPL) projects insurance market continued to be arguably overloaded with capacity – rates continued to be extremely competitive, and largely unaffected. Further reserving on a number of high profile losses throughout the course of 2018, however, this has finally started to have an impact.
We saw several high-profile fires – the Mandarin Oriental Hotel, the Glasgow School of Art and the Belfast Primark – all carrying eight or nine-figure reserves.
In addition to these high profile major losses, insurers have suffered from industry-wide issues related to attritional water damage losses. Although the majority (but not all) result in smaller individual claims, they have consistently eroded insurer profitability and arguably had a greater overall impact on underwriting results than the more high-profile fire losses.
As a result, since Q4 2018, we have now seen seven insurers cease writing Construction All Risks insurance in the London market. The impact of this has been a hardening of the UK projects insurance market, with rates increasing principally in relation to project CAR and EAR business. There is then additional scrutiny on projects involving large existing structure refurbishments. Insurers are also demanding greater underwriting information up front around water management plans and applying increased excesses in respect of water damage.
Whilst this all paints a fairly negative picture, the good news is that there is still significant capacity in the London Construction market for the right risks, if managed and brokered correctly.
The markets dropping out only accounted for about USD 500m of Projected Maximum Loss (PML) capacity, meaning there is still ample appetite and capacity of about USD 2.5bn from the remaining insurers and there is additional capacity entering the market from carriers such as Berkshire Hathaway and Liberty who have seen this market shift as an opportunity to begin writing these classes of insurance. Whilst we have seen an increase in rates, they are still significantly below where they were five or six years ago and still offer cost effective protection for project owners and developers.
In other developments
Indemnity (PI) Market
From a buyers perspective we have seen further deterioration of market conditions since our last update. A Lloyd’s report published in August 2018 identified non-US PI as one of the worst performing classes of insurance with 62% of syndicates having made an aggregate loss over the last six years. Lloyd’s has responded by placing strict controls and intense scrutiny on the insurers who continue to write this class.
This has resulted in a number of insurers withdrawing from the construction PI market altogether, and others applying greater selectivity when evaluating clients risks and layers on which they are willing to participate. In combination with total annual premium caps on business underwritten by each Lloyd’s insurer, the pressure on clients when renewing their programmes has increased significantly.
The market has an expectation that clients recognise their professional risks and the importance of implementing a robust risk management programme which addresses their activity pro le, supply chain and contractual controls. In order to provide these assurances and help put themselves in the best possible position relative to their peer group, it is vital that Clients partner with a proactive insurance broker who specialises in this class.
Latent Defects Insurance (LDI) Market
The LDI market continues to grow fuelled by recognition of the enhanced protection an LDI policy affords the purchasers of assets post completion. Indeed, as well as directly smoothing
the sale process LDI is also increasingly recognised as a requirement in many Agreements for Lease, particularly where anchor tenants on long-term leases have increased negotiating power, thereby ensuring it is considered a ‘core policy’ by developers.
Coverage and premium rating continue to improve based on attractive loss ratios, with market capacity increasing to in excess of GBP 1bn for correctly presented risks. Several major London insurers are also considering a further push into this sector and if that happens there is potential for a ‘softening’ of market conditions in the future.