July 2024 Market Update – Construction Material Damage

We continue to see improved market conditions in relation to material damage markets. Capacity is returning and appetite from local and international markets has improved renewal outcomes. Premium rates have stabilised, and some reductions continue to be achieved where a desirable risk is presented to the market. Insurers continue to closely monitor and review risk management policies and procedures. Contractors with lower hazard activities and positive claims records are preferred by insurers, and this is reflected in terms and conditions achieved for those clients.

Australian insurers, underwriting agencies and Lloyd’s of London continue to seek shared project risk placements rather than being exposed to a full limit loss on both single projects and annual placements, leading to a longer lead time for advisors to negotiate consistent coverage on placements. Underwriting information is analysed in detail across the commercial, industrial, and residential sectors.

As per our recent article, underwriters continue to be disciplined in respect of applying policy sub limits on renewals to reduce their exposure in the event of a loss. Advisors and clients need to consider their actual exposure to ensure insurance cover is adequate for their specific needs. In softer market conditions insurers were willing to accept a simple percentage of sum insured to apply to sub limits, however, they now wish to discuss the exposure prior to releasing such additions.

There continues to be a shortage of experienced underwriters in the market, leading to an unfulfilled demand for talent in the industry, which is likely to continue in the medium term, and could further trigger underwriter movements between insurance providers.

Whilst the local insurance market remains more competitive than Lloyds of London, this is beginning to shift. Recent pricing and terms received from overseas markets are much more closely aligned to local markets which is a clear signal that Lloyds will become a bigger threat to local carriers over the remainder of 2024.

The two “market speeds” in the construction sector continue as insurers seek out profitable business and manage their portfolios through more comprehensive risk selection. Clients with significant losses (loss ratios of 80 per cent or more), poor market reputation or historic annual remarketing, are viewed less favourably and are generally not seeing improved renewal outcomes. In contrast, improved renewal terms are being offered for clients who can demonstrate good claims experience, proactive risk management procedures and insurer loyalty.

There remains limited appetite for policyholders with poor claims experiences, or those clients who have a history of changing insurers on a regular basis. Contractors should seek to nurture a relationship with their insurers (which should be reciprocated by carriers) where appropriate, to demonstrate loyalty and seek improved renewal outcomes.

Increased activity in this sector continues. Developer and contractor experience is one of the key underwriting considerations – ability to demonstrate experience on similar projects, project history, operating history, company structures and use of contractors/consultants are all assessed as part of insurer reviews.

iCert ratings are also considered in a positive light by some insurers – though obtaining such a rating only provides insurers with confidence in the financial stability of the contractor and does not replace the need to demonstrate sound risk management.

Structural Defects Insurance (or LDI) has not experienced a great take up by the market. The limited cover offered suggests that contractors believe they can manage such risk through improved business practices and have not seen any particular need for the additional expense of this cover. Reforms and the scrutiny of the building commissioner of poor work practices in NSW has provided insurers with more confidence in project delivery.

We expect continued enforcement action by regulators (particularly in NSW) to continue quality improvement across the sector. Insurers have suggested that many current projects are seeing increases in overall construction costs and delays in completion.

Contractors should ensure that they carefully consider their project timeline when approaching the market to avoid significant additional costs associated with policy extensions required due to delays in completion. We have noted many single project delays due to longer construction lead times, and in particular delays by regulators in issuing Occupation Certificates. This can lead to a delay between actual completion and the end of the policy period. In this scenario, insurers are effectively exposed to a 100 per cent loss whilst the building is vacant awaiting the occupation certificate so strata insurance can be arranged. This necessitates extensions to cover and additional premium costs.

Insurers have definitely improved their attitude to this sector and are showing a greater interest in these projects over the past 6 months, and we expect this to continue.

Insolvency continues to be an active consideration for insurers. Material damage insurers would rarely in the past perform financial due diligence on proposers. This has now become a standard procedural task during the underwriting process. Insurers are asking for details of project status around delays in completion and costs escalation.

Recent insolvencies will add to this pressure, particularly in the cottage/residential project home market. However, escalating construction costs and troublesome previous “fixed price contract” projects of the past 36 months are now largely complete, although we have seen a significant increase in the square metre rate on construction projects placed. Further details of this exposure is set out in our article here.

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 change in government has not yet led to any reduction in the investment in infrastructure spending at a federal level. However, it is likely the improved market conditions will see such projects more easily placed into the insurance market.

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 joint venture) 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.

Subcontractors are becoming more aware of the existence of principal arranged policies and seeking contractual indemnity under these policies. Whilst this is usually readily available to the subcontractor, often the deductibles on the primary policy are likely to be significantly higher than the subcontract is accustomed to (or able to) pay. We have seen instances of deductibles exceeding $750,000. This often means the subcontractor will still wish to indemnify under their own policies on larger projects (and therefore pay full premium for ground up cover).

The complexity and value of infrastructure projects continues to increase. 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, and generally requires capacity from both local (Australian) and international (Asia and London) insurers to complete the placement.

Given the insurers focus on weather related perils and the shift in atmospheric conditions to La Nina, insurers are taking a more stringent line on civil projects generally. Contractors in this sector will need to provide detailed weather management plans and risk mitigation strategies for underwriter’s review. Consideration should be given as to whether single project policies provide more opportunity to tailor cover and price to the specific geographical conditions and peril profile of the work site.

Claims for water damage 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. Contractors are now expected to have a water management plan, and on larger projects physical water damage prevention measures to avoid the escape of water from new plumbing fixtures.

Insurer selection remains key for the medium-term strategy of construction firms. Bellrock recommends partnering with a stable insurer to retain coverage and to seek improved premium rates by demonstration of sound risk management and low claims as the market improves over the next 12 months. We generally notice reductions are achieved as market conditions improve without the need to break a long-standing relationship. Often the incumbent insurer will meet the market on pricing where they wish to retain good quality construction business.

Finally, we continue to see delays in responses from insurers, due to the volume of their workload and the shortage of experienced underwriting individuals. Contractors need to provide comprehensive information and allow enough time for options to be explored. It is difficult to obtain competitive, comparable pricing from the market unless there is enough lead time to engage and negotiate. Engagement with the market at least 2 months prior to expiry (even if this is without updated renewal information) is imperative to the renewal process to ensure potential markets are identified and are resourced to assist when presented with an underwriting submission for consideration.

For more in depth market updates by product class, profession and industry, please see our individual reports below: