2022 Market Update – Construction Material Damage

Construction insurance market trends that emerged in 2021 remain consistent with 2020. There are moderate increases in pricing and very slight changes to the terms and conditions of cover offered.

Material damage insurers are continuing to manage their portfolio through risk selection, with the market starting to show signs of improvement in both capacity deployment and easing of pricing.

There has been a great deal of publicity in respect of the build quality of high-rise apartments with many state governments taking steps to ensure that consumers are protected when purchasing dwellings from developers. Insurers are also playing their part, with a preference for established contractors over start-up special purpose building companies related to the developer undertaking construction. This is reflected in pricing and terms and conditions received.

Major infrastructure projects continue to be progressed at both state and federal levels, with road projects involving tunnelling and major static infrastructure projects in the pipeline. There will continue to be challenges to place cover for these projects given the reduction in capacity in the market over the past 3 years. Most of these projects are placed on a principal arranged basis, with cover being placed on behalf of the contractor by the State Authority. This has often meant that the market is pricing risk prior to knowing which contractor (or JV) has been awarded the contract. Insurers are therefore looking at the risks associated with the project in more detail given they are unable to fully underwrite the contractor undertaking the works.

The residential building market has experienced significant increases in material costs as a result of material shortages. This has led to concerns about insolvencies in that segment of the market. There have already been a number of high-profile collapses in the residential building market, a worrying trend which is likely to continue until supply increases and prices ease. The expected reduction in house prices predicted for 2021 didn’t eventuate (in fact the residential market has experienced a significant increase) though economists suggest this is still likely to occur in late 2022 or early 2023. This will put further pressure on the sector.

As stated insurers have sought to reduce their exposure to a single loss by reducing the capacity deployed. This has meant that often 2 or more insurers are required to support a limit in excess of $50m, whereas in the past up to $100m could be underwritten by a single market. This leads to additional negotiations with insurers on large contractor placements to ensure that the cover obtained is consistent and that cover is not degraded when a second insurer is supporting the placement.

Insurers continue to review their loss records and have recognised a trend in respect of water damage claims. Such claims arise from bursting of plumbing causing damage to the works under contract. Insurers are asking for detailed risk management advice as part of submissions and where water damage is seen as a significant exposure imposing increased deductibles for such losses.

In addition, insurers continue to thoroughly scrutinise claims, in particular the wording of the insurance contract. Some insurers will often avoid granting indemnity as a strategic denial to avoid paying legitimate claims. See our article here. Insurer selection is therefore critical, and you should seek advice from your broker in respect of insurers claims performance and philosophy when placing/renewing cover.

It remains critical for your broker to have a deep understanding of the construction insurance market when negotiating on your behalf. There are still only a relatively small number of insurers operating in this market, as such, once a market has taken a position on renewal it is difficult to alter that position.