CAR Insurance Market Update

Some insurers have withdrawn from the contractors' all risks (CAR) sector, and capacity is tightening. Discover the implications for construction companies

Since 2018, the construction insurance market has undergone drastic change, transitioning firmly out of a very soft market.

A 15-year environment of falling insurance premiums and broadening coverage made way for restricted coverage, and increased rates and excesses. Soft market extensions have declined, and policy coverage is being challenged as construction insurance markets seek to mitigate their exposure.

With existing project policies, issues are arising related to period extensions and reinstatement to delay in start-up (DSU) covers. Negotiations are further complicated by the number of markets that are now in runoff.

To ensure consistency in terms, some insurers with global footprints are removing authority from regional underwriting teams and placing it with their central offices. Particular focus has been around DSU coverage, especially coverage for infectious disease, cessation of works, and denial of access extension provisions, with most now implementing a range of specific exclusions driven by COVID-19.

During meetings with insurers, the overall period of policies is becoming an issue for underwriters. At the time of writing, maximum periods of seven years (including defects) were the most that one market was prepared to offer. In another instance, any period of more than seven years required signoff from head office.

Specific Areas of Concern

Residential Sector

Several insurers are withdrawing, and fewer underwriters are offering lead terms, particularly on structures of more than 11 storeys. Insurers are particularly cautious with any portfolio that has a poor claims experience or includes risks outside of their core underwriting appetite, and are increasing premium rates and restricting cover. They are placing a greater emphasis on analytics and reliable data, particularly in respect of claims and the risk management of assets. Despite this, there is still an appetite to underwrite well risk-managed residential portfolios.

Water Damage

Water damage is a significant market concern. Escape of water claims (which account for approximately 60% of all claims) dominate loss ratios in the residential sector, and brokers are seeing instances where water damage is excluded from policies.

Insurers are keen to work with brokers to identify sites that perform poorly from a claims perspective. Many markets are encouraging clients to follow the advice in Managing Escape of Water Risk on Construction Sites, the guide issued by the Construction Insurance Risk Engineer Group, and endorsed by the UK CAR Underwriters Group. One key lead insurer insists on automatic water shutoff valves as a condition.

Timber Frames and Cladding

Timber frame buildings continue to be a challenging area. Obtaining cover for a project of more than three storeys can be an issue, even with adequate separation between blocks. Market rates for timber frame buildings can be three times those of a steel frame build, and policies come with higher excesses.

Since the Grenfell fire tragedy in June 2017, underwriters have been cautious about cladding. They seek a greater understanding of full construction methods, with focus on the composition and installation of cladding, particularly with projects that are more than 18 metres high.

Project Case Study

Sudden Increase in Insured Values and Period

Our market relationships were put to the test when the contract value and construction period of a major project we had placed, more than doubled.

The project, a 45-storey hotel, had been scheduled to take six years to build. Situated on a 6,000-square-metres plot, the specification included 880 rooms, five levels of underground parking, a conference centre, restaurants, and other amenities. It was originally placed with four carriers.

However, two weeks before period expiry, 24 floors were added to the project tower specification. This required an extension of seven years to the construction period and resulted in a contract value increase of more than 100%. A change in contractor further complicated the issue.

With combined third-party liability (TPL) and CAR cover rarely available in the territory in question, in the current market environment, the insurance had to be cancelled and rewritten. We approached more than 20 insurers to obtain a successful replacement insurance programme, which took four-and-a-half months to achieve.

The programme was split into two sections: CAR and TPL. Two reinsurers provided the TPL cover to the required 98%. Nine reinsurers were necessary to complete the 98% reinsurance order for the CAR, on four separate placements. The remaining 2% was retained by the local insurer. Compared to the original placement, the extension premium cost more than 700% of the original premium; adjusting for the increase in values, it would still be more than 350%.

Background to the Transition: Project Failures, Natural Catastrophes, and Fires

The current market conditions follow a long period of low interest rates, which made insurance a viable investment class for institutional investors seeking financial returns. There followed an influx of capacity into the market, creating increased competition, driving down rates, and widening the cover insurers were willing to offer in order to win and retain business.

One of the key drivers for the change in market conditions were large claims on high-profile engineering, oil and gas, power, and hydroelectric projects. These served to highlight and expose the diminishing premium reserves held by underwriters, as a result of the prolonged soft market cycle.

Since 2018, there have been a significant number of these major claims, one of which, a hydroelectric project, looks set to be the largest individual CAR claim of all time.

The Harvey, Irma, and Maria (HIM) hurricanes in the US also contributed to the transitioning of the market, incurring a combined total cost of around US$125 billion.

Closer to home, there have been several major losses in the UK, including high-profile fire losses such as the Grenfell fire tragedy, the London Mandarin Oriental Hotel, and the Glasgow School of Art. This is in addition to the increase in water damage claims during the past few years, which have also been very damaging to insurers' balance sheets.

These losses have attracted a greater focus from both Lloyd’s insurers on underwriting profitability and the overall viability of CAR insurance. As a result, a large number of CAR underwriting teams have ceased writing business. Others are undertaking a very selective underwriting approach, or have undertaken internal reviews and overhauled their underwriting criteria.

This has caused about £600 million of capacity to be withdrawn from the market. New capacity has been slow to establish itself as reinsurance capacity is increasingly sought from a reducing pool, with Brexit causing further uncertainty around long-term underwriting considerations for many insurers.

The diagram below illustrates how the insurance market traditionally operates:

COVID-19

The insurance industry will be hit hard by COVID-19 exposures, with the full extent of them not yet known by the industry. The likely impact, however, is receiving serious attention at a senior level within various insurers, and we are seeing more insurer requests to impose COVID-19/pandemic exclusions, often regardless of whether a real exposure is expected.

The pandemic accelerated the market’s transition in the first half of 2020. It has been suggested that conditions will remain in transition into 2021, as the global market assesses the impact on its construction portfolio.

Implications for Policyholders

As a result of the transitioning market conditions, most of the market is amending and reducing cover and benefits that were the norm for many years. Each risk is considered on its own merits, but some of the standard changes are as follows:

Policy Amendments

Period Extensions: Previously, up to 90 days would be automatically included for no additional premium, and further extensions at no higher than pro-rata, but this is no longer the case. Period extensions may now be limited to pro-rata for a short period, then at terms to be agreed. This reduces cost certainty if large extensions are required and, in some cases, extensions may not be secured at all.

Excesses: There are increased excesses across most areas, but particularly losses arising from water damage and defects in design, workmanship, and materials.

Coverage Amendments
Removing DE4 and/or DE3 or LEG2 drop-down option.
Reduction of consequential loss cover.
Addition of water management type conditions.
Heat conditions.
Removal of low-claims rebate.
Addition of infectious disease exclusions.

More alarming is that some of the conditions being required by insurers are condition precedents, therefore these clauses must be complied with. Otherwise, in the event of a claim, insurers might be able to avoid liability.

In addition to the amendments to the coverage and increase in excesses, we also see an increase in the rates charged by insurers.

Navigating the Market

As the market continues to transition, it might become harder to complete placements due to a lack of capacity, even with higher premiums and reduced cover.

In order to limit cost increases and improve risk profiles, companies should make time to work with their brokers to develop an organised and methodical risk transfer process. The more effort deployed in the early stages to develop and evaluate risk information, the more effective the risk transfer.

The marketing phase is critical, particularly its management strategy. When engaging with insurers, it's important to take every opportunity to demonstrate an understanding of current risks more deeply than the competition, present a solid risk profile, and demonstrate good risk management procedures.

To do this, construction company C-suites should work with their project personnel and risk and insurance managers to comprehensively understand their risks. And risk managers should engage at a very early stage with their construction insurance brokers to organise and deliver comprehensive underwriting presentations.

Achieving the Optimum Result

Certain areas need to be targeted to ensure that the best result can be achieved from the insurance market:

Time – allow as much time as possible to engage in the insurance discussions.

Information – insurers are utilising risk engineers to review all information, and this will be scrutinised far more than before.

Questions – expect additional questions following the review of information. Respond to these questions promptly and in detail.

Subjectivities – insurers might provide terms "subject to...". These conditions must be satisfied, and cover and terms cannot be fully confirmed otherwise.

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