Stay Ahead with Cruden Read: May Market Summary and Analysis
Coming into 2023 the insurance market had experienced a number of years of sustained hardening, with year on year premium increases and more restrictive coverage terms being applied across the segment. Whilst we are not seeing any significant shift from this position, there are certainly a number of identifiable industry segment trends coupled with a general tapering in premium rate increases.
Of particular note through the first quarter of 2023 is the insurers focus on upward movement of deductibles and the continued scrutiny of policy terms and conditions. Claims affected and high risk occupations continue to see premium rate increases upward of 20%.
Insurers continue to be mindful of their capacity with risk selection remaining the focus. Thermal coal, high rise residential and weather exposed risks continue to present a problem in the local Australian market. Furthermore, Environmental, Social and Governance (ESG) responsibilities of insurers will continue to plague the already difficult mining and mining infrastructure sector through the second half of the year and beyond. We are seeing solutions out of London for these types of risks, however the premium rate differential to that of Australian markets can be considerable.
Late in 2022 Zurich announced they would no longer be writing Project Specific business out of Australia. Whilst the impact of this decision is still materialising, it will no doubt also have a flow on impact to annual programmes. Unfortunately we are not seeing any significant volume in new market entrants which would serve to stabilise this. Furthermore, at this stage we are not seeing corresponding increases in capacity being offered by existing market players, thereby creating the possibility of further local market contraction.
Increases in the contract works market have slowed in the first quarter of 2023, with most insurers seeking increases in the range of 5% to 15% for risks which have not been subject to claims. There remains very little appetite in the local market for claims affected risks. As a result, we continue to see increases upward of 20% as incumbent markets seek correction of these programmes. Positive outcomes in all circumstances remain dependant on the demonstration of sound risk management practices and protocols.
Following the significant flood events of 2022, we are seeing much stronger focus on weather and water damage losses. Insurers are placing greater responsibility on insureds to manage this exposure by imposing elevated deductibles for losses arising from water damage. In general weather impacted risks continue to be difficult to place.
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 placements with construction values greater than $50m.
It is expected that further contraction in the local contract works market will occur following the above-mentioned announcement by Zurich. It is too early to determine the flow on impact this decision will have on the local market.
The impact of losses following contractor insolvencies should not be underestimated, insurers are seeing resultant claims for malicious damage or defective works. Subsequently, it is becoming an area of focus, especially as insurers of these contractors become morally obliged to continue cover for project owners or incoming contractors. With more insolvencies expected to follow, increased focus on financial strength by insurers should be expected.
Despite year-on-year premium increases and significant scrutiny over premium terms, the Liability insurance market for construction risks continues to be challenging into 2023. There are a number of factors driving this, however a lack of genuine market entrants in the Construction Liability segment is the major contributing factor. Through the first quarter of 2023 we are seeing rate increases of 5% to 15% on clean risks. Claims affected and risk exposed accounts continue to be extremely difficult to place in the local market, in particular high rise residential projects. There remains an appetite for high rise residential out of London.
Insurers are also focusing on coverage issues and tightening of wordings, with exposures such as Cyber, Professional Indemnity write-backs and interference covers all being restricted. We are also seeing an increased prevalence of Silica exclusions being applied.
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, the approach is now consistent across the insurance market.
Compounding this is the increasing claims costs. Whilst claims cost inflation is a problem across all insurance classes, long tail insurers are sighting supply chain issues and ‘social inflation’ as a major contributing factor. Social Inflation relates to inflation in claims costs driven by non economic factors such as legislative changes.
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.
The Professional Indemnity (PI) insurance market has hardened considerably over the last three or four years for construction related exposures. Following a period of sustained losses insurer appetites, both local and international, have been severely impacted. Many of the more prominent insurers in the space have exited the market for construction related PI exposures and / or have greatly amended the terms at which they will participate. This has led to insured entities being required to pay significantly higher premiums for less cover and subject to increasing deductibles.
The market has remained hard in the second half of 2022 and early 2023 as there is little new competition available. However premium increases, where renewal is offered by a holding insurer, have reduced from previous years which may be an indication that the market has or is close to reaching optimum levels. However, there is still pain being felt by some insureds as AIG, considered to be one of the prominent PI insurers for construction risks, has withdrawn capacity from the market and many insureds that have been effected by this have experienced difficulties in obtaining insurer capacity to replace that which has been withdrawn
Unfortunately with the very real prospect of a recession on the horizon, coupled with the rising cost of claims means we are unlikely to see any significant shift in the construction insurance market in the short term.
Premiums are not increasing at the rate of previous years, however they do continue to increase at more moderate levels as insurers shift their focus to upward deductible movement and tightening of policy conditions.
Insurers are not aggressively chasing business, are more particular with the risks that they underwrite and showing a “take it or leave it” attitude. Therefore, quality client information and early engagement will continue to be key to ensure optimum outcomes.