June 2022 Insurance Market Observations

BY JEREMY READ | 21.07.22 | CATEGORY

As everybody that has an involvement is aware, the insurance market for construction and engineering risks has hardened considerably over the past three years. Insurers that were previously prominent in the space have exited from the sector and insurers support for the various underwriting agencies that have previously been able to offer solutions has reduced considerably. The effect of this is that insurance pricing has increased year on year as well as pressure being applied to deductible structures and the breadth of cover being supplied.

Now that we are half way through 2022 we thought it a good time to reflect on where the market is currently at based on our experiences and also provide some thoughts on how the remainder of the year is likely to pan out.

Contract Works (Material Damage) Insurance

We are yet to see any noticeable market softening in this insurance class. However, pricing increases being applied by holding insurers on renewal business has slowed with most insurers seeking small increases in the range of 5% - 10% for risks which have not been subject to claims.

There is however a much stronger focus on water damage losses and insurers are placing greater responsibility on insureds to manage this exposure by imposing elevated deductibles for losses arising from water damage.

There continues to be an appetite in the open market in Australia to write the harder to place civil projects at a price point and on coverage terms which reflect the various insurers view of the exposures. Generally, the insurers that are active in this space will limit the capacity that they will make available, and it can often require a number of participating insurers to achieve a 100% support on civil project placement with construction values greater than $50m.

Third Party Liability Insurance

The TPL market for construction risks continues to be challenging.

Insurers that are operating in this space continue to see an influx of “worker to worker” claims from construction contractor clients. Such claims are very difficult to defend and / or avoid as the party that has care of the site on which an injury has occurred will likely carry some responsibility and legal liability for an injury on the site whether due to its fault or otherwise. Therefore, insurers view such losses as inevitable for construction contractors and are imposing elevated deductibles for such losses in order to control their exposures. In our view the worker to worker deductibles being applied to some placements are excessive. However, the approach is now quite consistent across the insurance market.

There are still a very limited number of insurers available in the Australian market to write construction liability placements and very little opportunity to create any competitive tension between insurers. Over recent years many risks have found their way to the Lloyds Insurance market in the UK either through underwriting agencies operating in Australia or through the wholesale broker market. However, at least one of the major supporting Lloyds Syndicates has dramatically revised their underwriting approach to Australian business in 2022, the result being higher premiums and deductibles for worker to worker losses and a reduced insurer capacity. This has had an adverse effect on terms being offered from Lloyds insurers to construction businesses in Australia.

Professional Indemnity Insurance

The professional indemnity market for contractors operating within the design & construct space as well as organisations providing engineering services has continued to be difficult.

Whilst there is a small handful of insurers in Australia that are still operating within the space there is very little appetite to take on new risks / clients. In our experience renewal premiums have typically been increasing by approximately 10% in the first half of 2022. However, the first half of 2022 has also seen capacity withdrawn from the market (both the direct insurer market and agency market) which has necessitated some insureds having to find new capacity to replace that which has been withdrawn. As there is very little appetite for new business in the local professional indemnity market this has led to some clients incurring significantly higher premium costs and higher deductible levels than they have ever experienced in the past.

The Lloyds insurance market is similarly challenged on professional indemnity placements for construction related risks. All insurers have a very limited appetite and are extremely cautious in the risks that they will write, the terms on which they will write them and the capacity they will provide.

Again, some insureds are being required to carry very high deductibles which could prove financially challenging to meet should a claim occur.

Outlook for the remainder of 2022 and beyond

In the near term it is difficult to see any change in the market. For a market softening to occur there would need to be an up lift in competition through new market entrants and /or a desire from current providers to increase market share. Currently there is little sign of this happening and, given the increase in catastrophic events and climate change concerns as well as the current economic environment, it is not likely that we will see any significant market shift in the near term.

Having said the above there has been some levelling and slight softening in other parts of the insurance market and at some stage the market for construction risks will turn as well.

How best to navigate the continued hard market

In market conditions that are currently prevailing an insured needs to be prepared to provide a much greater level of information to insurers in order to demonstrate that is has strong risk management practices and procedures in place. Also, where insurers ask questions during the placement phase the insured should be prepared to provide a full and comprehensive response. Insurers will provide a more favourable response to insureds that demonstrate a willingness to work with them and treat its insurer as a business partner.

Also, long term insurer relationships are advantageous when navigating a hard insurance market. Insurers treat their longer term supporters / partners much more favourably.

Thirdly, partner with a broker that is a specialist in the construction and engineering space to ensure that the best possible terms are negotiated, and insurer relationships are managed most effectively.