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Capacity crunch hits construction sector

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The Australian construction insurance market is experiencing a shift to increased pricing, higher excess levels and more restrictive coverage after a spate of natural catastrophes and project failures, Marsh reveals.

In its construction market recap report, the broker says reinsurers have indicated a potential move away from longer term construction risks to annually renewable risk exposures.

Treaty renewals last month saw an increase in reinsurance costs. That followed deteriorating profitability which led to several insurers withdrawing from the construction sector altogether.

“Market-defining losses throughout 2018 and 2019 have demonstrated that the construction sector is not immune to major events,” the report says.

“There has been significantly reduced market appetite for long contract periods, which is an indication that capital is moving away from long-term risk and back to short-term risk exposures.”

A series of high-profile power, hydroelectric, and oil/gas project failures around the world have intersected with a number of natural catastrophes in recent years, including active hurricane and typhoon seasons, flash floods and landslides.

COVID-19 has also impacted construction sites across the world, leading to extended periods of cessation of works and insurers are now considering coverage restrictions on all new placements in the construction sector.

Many insurers have placed their construction books into run-off, and in the last year or so, 15 global lead markets who were active in the Pacific region, which includes Australia, withdrew from underwriting construction risks, resulting in a loss of $US1 billion ($1.27 billion) in market capacity.

There is reduced appetite and greater scrutiny for projects involving airport loss exposure, tunnelling risks for road and rail, US liabilities, marine works, COVID-19, cyber, thermal coal, dams, wildfire, and storms in the context of global warming.

"Some unprecedented engineering losses has driven several insurers to review the long-term sustainability of their participation in construction,” Marsh says.

Contract works insurance premiums increased on average by 30-35% throughout last year in the Pacific. Construction liability insurance costs also rose, with excess layer pricing increasing at 15-30%.

"We expect insurers to continue to focus on writing profitable business and being more selective with their terms and conditions of providing cover for construction risk,” Marsh says.

In the Pacific region, financial and professional lines experienced average pricing increases of 51% across portfolios in the fourth quarter of 2020 for all lines, with construction professional indemnity (PI) premium increases “substantial”, the report says.

“All composite lines of insurance, including property and casualty, are on an increased rate trajectory,” Marsh says. “Major markets walked away from risks that do not meet strict underwriting guidelines as insurers’ global head offices adopt an underwriting approach focused on technical adequacy and profitability.”

Some of the key trends listed by Marsh include that the emphasis has shifted from writing new business to profitable terms and conditions and project extensions, and changes require longer negotiation times.

"Underwriters are restricted from deviating from their original approved terms. Consequently, many underwriters are waiting for lead terms to be finalised before considering their participation and starting the referral process,” Marsh says.

Water damage is a key concern, with extensive claims activity for residential and building projects relating to risks of water ingress. As a result, premiums have increased and, in some instances, cover is sub-limited or excluded altogether. Escaping water claims account for over 60% of all claims within the London market.

Marsh says businesses seeking construction cover can position themselves to generate better outcomes by investing time into working with brokers. Those who can demonstrate reduced risk and associated capital spend, minimise their claims experience and maintain key insurer relationships will be best-positioned to obtain the broadest available cover and above average pricing changes.

“Despite a challenging market entering 2021, insureds can position themselves to generate better outcomes and navigate the market successfully in order to limit cost increases,” the report says.