The events that shaped Australia’s construction landscape – Jonathan Frost reflects on 20 years in risk management

This year Bellrock Director and construction & development insurance expert Jonathan Frost celebrates 20 years in the insurance industry. In this time he has witnessed the ebb and flow of Australia’s construction sector first hand, observing how economic, political and environmental factors have all influenced the construction risk landscape. Here Jonathan shares some notable recollections and thoughts on the future of risk in this dynamic space.

“There has been a dramatic change to the construction insurance landscape in the past 20 years. It is interesting to look back at how significant events have impacted the construction insurance landscape and how closely the two are related.

My career started in 2001, just days before the collapse of FAI/HIH. The fallout from that event had significant impact on clients, insurers and brokers. As a newbie to the industry, I probably didn’t appreciate it at the time, and just figured that the insurance world was a tough place to do business. Overnight clients found themselves uninsured, and given the market share held by HIH, brokers were tasked with finding alternative placement options for a significant number of clients under their management. At the time, the insurance market consisted of a great number more insurers than exist today, which created a great deal more work locating and securing terms to replace cover. It was a time where the telephone and fax machine were the preferred method of communication as online technologies and placement platforms were still being developed for use in the industry.

Then in September, world events meant the issues faced in the Australian market became a global issue. Insurers worldwide were exposed to significant losses to their portfolios from the WTC disaster, and immediately became conservative in their underwriting approach. This put further pressure on insurance pricing, and any businesses operating at the time would recall significant premium uplifts over the 2001-2004 period as a result of tough insurance market conditions.

In Australia from 2004 the market started to relax, capacity returned to the market, insurance policy terms improved and pricing began to fall. Construction clients enjoyed modest reductions in the period from 2004 to 2010 as insurers competed for business in the sector as it was viewed as relatively stable and well priced given the risk profile. Brokers competed hard for business in this sector as it was seen as highly profitable, particularly with there being a lower benchmark in terms of disclosure requirements around commission rates.

At the end of the global financial crisis, insurers in the construction space really ramped up competition. Rates fell to pre 2001 levels as insurers fought to grow their market share and policy terms and conditions improved as did price. Contractors enjoyed a period of sustained reductions and whilst claims costs (particularly in relation to “worker to worker” claims) increased, insurers continued to support the sector. Many Insurers argued at the time that pricing was unsustainable – however the number of insurers in the sector meant there was downward pressure on pricing.

Infrastructure project expenditure was increasing, particularly road and rail projects and within the mining sector. Capacity was abundant and pricing fell to record lows.

Local and world events again changed the construction insurance landscape with combustible cladding fires on buildings bringing insurers’ exposure (particularly from a design/ professional perspective) to light. Weather events globally and particularly in Australia resulted in insurers suffering heavy losses to their portfolios. It seemed premiums received were well below what was needed to cover the significant losses incurred by the market.

Insurers started to examine their portfolios and found construction business wasn’t profitable. Over the course of the next couple of years a large number of insurers exited the space altogether. Insurers which had supported the sector for decades were now shutting down their construction portfolios, declining to cover builders’ professional liability exposures as they couldn’t see a way to remedy the book of business they had insured.

From 2018 onwards, insurers’ appetite for certain sectors has evaporated, capacity has reduced, and terms provided are no longer the same as enjoyed in the first part of the decade. For the first time in over 15 years contractors encountered significant increases in pricing and difficulty in obtaining terms.

The Australian market has been further spooked by recent media coverage of defective residential apartment buildings. Insurers are concerned that they have a long tail of exposure resulting from defective buildings and to curb potential losses are no longer supporting residential apartment construction (which was once seen as a benign, safe place to provide capacity). Large infrastructure projects are also becoming more difficult to place, with a great deal more insurers required on placements to achieve 100% cover.

There have been signs of improvement in the past 12 months. Insurers are starting to believe pricing is where it needs to be and have completed remediation of their portfolios. Moderate increases or steady pricing is starting to be seen from insurers for those clients who can demonstrate they have a well-run business with risk management practices embedded within.

There is no doubt that it has been a tumultuous 5 years, and looking over the last 20 years it is amazing both how the market cycle continues to occur, and how world events can affect insurance outcomes achieved and contractors operating in the sector. It also demonstrates the need for contractors to consider not just their most immediate renewal but also consider the macroeconomic conditions which could affect medium- and long-term outcomes. I have seen first hand the rewards of showing loyalty to insurers from renewal and claims perspectives, and what happens to clients who are viewed by insurers as price grabbers in the market when the market turns. Insurance remains a people business, and developing personal relationships with your insurers and broker will result in them working harder for the best possible outcome for your business.

I look forward to another 20 years serving the needs of the construction industry, which never fails to throw its share of curveballs to all participants. No other sector better demonstrates the often used mantra that “without insurance the world stops.”