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PI pain set to worsen as insurers harden risk appetite

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Rates for professional indemnity (PI) insurance and other key construction product lines are set to increase further in the coming months, Willis Towers Watson says in an Australia update, as insurers’ risk appetite for the problematic industry continues to shrink.

The Design and Construct PI class is the worst affected, with sustained losses inflicting more pain on local and global insurers, who are now demanding their own versions of a cladding exclusion to mitigate potential claims exposure.

In some cases, insurers have imposed exemptions for non-conforming building products.

“Previously available extensions for loss mitigation and rectification costs, express fitness for purpose and related parties are being scrutinised by insurers with levels of coverage being reduced or coverage being removed entirely,” Willis Towers Watson says in its Construction Market Update for June.

“Annual Design & Construct PI programmes must be managed closely by brokers and clients. This is the most volatile class of insurance for Design & Construct contractors and is likely to be their biggest insurance premium spend behind Workers’ Compensation.”

Rates for Design and Construct PI have shot up by 20-50% or more so far, and in some cases, clients with claims history have seen increases of more than 100%, the broker said.

In the Project Specific PI market, local and overseas insurers are having second thoughts about taking part in large infrastructure works that run for multiple years, leading to significantly reduced capacity and coverage for these projects.

The outlook is similar for the Contract Works Material Damage and Construction Liability business classes, with insurers tightening further their already restrictive terms and conditions as well as underwriting criteria.

For Contract Works Material Damage, where rates for claims-affected clients in extreme cases have exceeded 100%, insurers are closely interrogating the appropriateness of limits of liability and corresponding sub-limits.

“Previously available coverage enhancements such as guaranteed maintenance and design exclusion are either no longer available or are only offered with increased rating and deductibles,” Willis Towers Watson said.

“Annual programmes with repeat loss history and exposure to extreme weather conditions are facing a rapid change to coverage and insurer capacity available, with insurers imposing separate major perils and water damage deductibles.”

In the Construction Liability class, insurers are looking at seven to ten years’ claims history to be able to deeply analyse incident trends, with a significant focus on worker-to-worker claims.

“Worker-to-worker deductibles are continuing to increase in order for insurers to manage the continued surge in worker-to-worker claims,” Willis Towers Watson said. “Given the long-tail nature of personal injury claims, the need for brokers and construction companies to work together and being proactive in managing legacy claims is paramount.”

Rates for Construction Liability have increased by 10-30% and 50-100% or higher for clients with prior claims.