July 2022 Market Update – Construction Material Damage

After 36 months of steady rate increases and restrictions on cover, this class is showing signs of improvement.

Material damage insurers are still looking to identify profitable business and are managing their portfolios through more comprehensive risk selection. Clients with good claims experience and imbedded risk management policy and procedure are starting to see more competition for their business. This has not existed over the preceding renewal periods. Clients with poor loss ratios less than 80 per cent are likely to continue to see moderate increases as insurers remediate their portfolios.

There remains little appetite to insure construction works related to high rise residential apartments. There has been a great deal of publicity in respect of the build quality of high rise apartments and insurers continue to be cautious when reviewing submissions in this sector. They take more time to review the experience of the contractor, with a preference for established businesses over start-up special purpose building companies undertaking construction. This is reflected in pricing and terms and conditions. Limited insurers will deploy capacity on large residential projects with many requiring multiple insurers to complete placement – this is in contrast with past experience where one insurer would seek to provide 100 per cent capacity even on projects up to $150M in value.

The residential project home market has experienced significant challenges in 2021/22. Whilst many were concerned about the direct impact of COVID-19 on the availability of trades (leading to project delays), higher material costs and labour costs have caused significant financial stress on the sector evidenced by the significant insolvencies that have materialised in the first half of 2022.

Economists predict further insolvencies over the next 12 months as builders complete projects under fixed priced contracts which were signed prior to adjustments being made as a result of increased costs. The expected reduction in house prices predicted for 2021 didn’t eventuate, though there has been significant easing of pricing in 2022 so far with economists suggesting housing prices will fall in late 2022 or early 2023. This may put further pressure on the residential sector.

Major infrastructure projects are underway at both state and federal levels, with road projects involving tunnelling and major static infrastructure projects in the pipeline. The recent change in government is unlikely to reduce the investment in infrastructure spending at a federal level. 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 continue to be 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 complexity of infrastructure projects continues to increase, which is likely to impact pricing on large projects. Insurers are taking a more conservative approach in capacity deployment which will mean a greater number of insurers will be required to complete these project placements.

As stated, insurers have sought to reduce their exposure to a single loss by reducing the capacity deployed. 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. It also means more time is required to negotiate terms and conditions with the market and detailed information is required by insurers which in the past has either not been required or considered by insurers to be acceptable without being reviewed.

Water damage claims continue to rise in both frequency and value on insurers loss records. 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. Weather perils are also increasing claims costs to insurers as a result of the recent wet weather conditions on the east coast of Australia. Many insurers are now seeking increased excesses for water related losses on construction projects.

Insurers continue to thoroughly scrutinise claims. Some insurers will have resorted to avoiding a grant of indemnity to avoid paying legitimate claims. See our article here. Insurer selection is critical, Bellrock will identify for our clients those insurers in the course of offering quotes provided by them.

Our experience on claims handling and outcomes varies significantly in terms of turnaround times (many insurers have limited resourcing due to assessors being overwhelmed by recent natural disasters) and commercial acumen (lack of technical understanding of construction leading to declinatures). Brokers have a significant role to play in claims handling and putting a detailed, easy to understand claims submission to insurers will result in improved outcomes (both time and payment).

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.