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GUEST ARTICLE: Arthur J Gallagher: The state of the market - PI insurance for the construction sector

How things can change in the space of a few months. Despite the backdrop of a poor 2017 for insurers, until the end of Q3/beginning of Q4 in 2018, the construction 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, has finally started to have an impact. The largest of these was the collapse of the Ituango Dam in Colombia, which currently holds a reserve in the region of USD1.5bn and, closer to home, 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.

When talking to insurers, however, it would appear these headline-grabbing claims have only been a contributing factor, as behind the scenes, the trend of smaller but more frequent water damage claims have continued to be the biggest factor hurting insurers’ bottom lines. As a result, since Q4 2018, we have now seen seven insurers cease writing Construction insurance in the London market. Whilst most of these have been Lloyd’s of London syndicates, the list of casualties also includes several large household names. The impact of this has been a decisive hardening of the market, with rates increasing significantly.

There is also particular scrutiny on projects involving large existing structure refurbishments. Insurers are also looking to apply increased deductibles/excesses in respect of water damage on all projects and demanding greater underwriting information up-front around water management plans.

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 account for about GBP400m of Projected Maximum Loss (PML) capacity, meaning there is still ample appetite and capacity from the remaining insurers, if managed correctly – and, whilst we have seen a noticeable increase in rates, they are still significantly below where they were five or six years ago.

In other developments

Annual Contractor Professional Indemnity (PI) Market - One area of the market which continues to harden. As the second-worst performing class of insurance in the whole of Lloyd’s last year (only narrowly behind the Marine Cargo market), Lloyd’s has understandably responded by placing strict controls and intense scrutiny on the insurers who do continue to write this class. This has resulted in premium caps on how much of this business Lloyd’s insurers can write per annum; only serving to increase the pressure on clients when looking to renew their programmes. Clients will need to be speaking to insurers more or less constantly throughout the year, in order to put themselves in the best possible position relative to their peers when renewal does come around.

Sally Flower is an Account Executive at Arthur J. Gallagher Insurance and is contactable on sally_flower@ajg.com

 

These notes have been prepared for the purpose of an article only. They should not be regarded as a substitute for taking legal advice.

 

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