10 June 2022
Creating a sustainable construction insurance market

Even prior to the coronavirus pandemic and the challenging industry conditions that followed in its wake, the construction industry was faced with rising insurance costs and reduced capacity as the insurance market began to harden. Since the onset of the crisis, this trend has continued; a report published by March in 2021 argued that remote working, the economic fallout of multiple lockdowns, and the impact of Brexit were just some of the events that “contributed to a continuation of insurance pricing increases and pressure on terms that started two years ago.”

Now, the onus is on the construction insurance industry to ensure a profitable and sustainable future following several years of heavy losses. But how can this be achieved?

Sustainability doesn’t come cheap

Prior to 2019, the construction insurance industry was enjoying a soft market described by some as the longest ‘in living memory’. Premiums were low, capacity was high and the market was highly competitive – a state of affairs that, due to the longevity of the soft market, came to be taken for granted. Generous premiums, policy extensions and wide policy wordings became the norm – but when the cost of claims began to rise, many insurers took heavy losses because the premiums they were charging were not sufficient to keep up with fluctuations in the market. Insurers responded by pulling out of markets, reducing capacity and raising premiums. Many insureds found themselves facing lengthy renewal processes, restricted terms and soaring rates.

This increase in claims in recent years can be attributed to a wide range of factors, from an increase in climate change-induced natural catastrophes to a trend towards higher-value, complex projects (and therefore higher losses).

The first step to breaking the cycle and creating a sustainable and profitable construction insurance industry is to ensure the premiums we are charging now can stand the test of time and withstand fluctuating market conditions.

Education is key

According to the construction insurance team at AXIS Capital, one of the main ways we can achieve this goal is by ensuring that underwriters and brokers have the training and education they need to fully understand how the decisions they make today could have an impact on the bottom line well into the future.

In an article in Insurance Business Mag, Steve Cross, unit head of construction at AXIS Capital, said: “I think a lot of underwriters now are taught to underwrite very well and there are some really good underwriters out in the market. But I think what has been lost is an understanding of how the money flows through the business, and the implications of some of the decisions that are made at the start of a project and how they manifest over the life of the project and can impact the results [years later].

In another article, he commented: “As seasoned members of the market, it’s our job to teach the new talent about how simple things like them agreeing to free extensions now could mean that in four years we won’t get an extra bit of premium that we are entitled to, which could put our underwriting year as a loss.”

Benefits of a sustainable insurance market

As we have explored, the future sustainability and profitability of the construction insurance market depends on a balanced understanding of clients’ needs and risk profiles, both now and in the future. Communicating this to clients, who as a result face higher premiums and restricted coverage after years of enjoying cheap deals, is no mean feat – but insureds are precisely the ones who suffer most in an unsustainable insurance market.

Ultimately, the benefit of sustainable premiums and coverage (aside from ensuring ongoing profitability for the insurance industry) is that clients won’t be facing soaring costs, lengthy renewal procedures and difficulty finding cover that meets their needs.