Andy Desmond, construction industry leader and UK industry leader at Marsh, said: “We've had a challenging market over the past few years, and rates have significantly increased.”
“I've recently talked to an underwriter, who said that they are now profitable for the first time in two years,” he added.
But not everyone believes the market has necessarily reached that point, with another noting that the class has simply hit a point of “equilibrium”.
Even if the latter were true, reaching a point of equilibrium is a hefty accomplishment for an embattled class that until two-years ago had been in its longest soft market period “in living memory”.
The state of profitability in construction, however, feels finely balanced, and can vary dependent on each individual carrier and the type and location of the policies on its books.
One source noted that an insurer considering itself profitable can also vary depending on whether it assesses its profits using an underwriting year loss ratio or a calendar year ratio.
Moreover, sources said just a handful of significant claims could tip the class back into loss-making territory, and the inflationary environment looks set to elevate claims severity at least in the near term.
On the other hand, surging project values and increased demand for capacity is working to tip the supply-demand balance in construction in underwriters’ favour, giving them more power to drive rate and set more favourable terms.
Construction of infrastructure will grow by 6.8% in 2021 and is predicted to be the fastest growing sub-sector to 2030 with expected average annual growth of almost 4%, according to a global construction outlook by Marsh.
This will be fuelled by emerging economies looking to develop energy, transport networks, sewage and waste systems, and other large-scale projects.
Rates on the rise
An uptick in fortunes for the class has primarily been driven by rate increases of between 100% and 300% in the last four years – depending on territory and type of project – mainly resulting from heavy losses and restricted capacity, according to sources.
Andrew Harrison-Sleap, executive director and global deputy head of construction at Howden said that rate rises are cooling off and will more than likely be in the region of 10% to 20% in the next 12 months, rather than triple figures.
However, others in the class were unwilling to commit to a figure, given the rapidly changing dynamics in the market.
Howden’s Harrison-Sleap added: “It is often difficult to predict exactly by how much rates will increase in the next 12 months, as underwriters always overestimate future rate movements, in an attempt to fuel future rate rises.”
Harrison-Sleap pinned the cooling off of rate rises that we are likely to see over the next 12 months primarily down to a natural tapering off, after such previously steep rises and because carriers are now finally registering profit.
But he said he believed compound rate increases have ostensibly given most underwriters enough additional rate to be profitable, and any increases over and above 10% to 20% are simply not justifiable or competitive.
Hydro has seen the biggest rate increase out of all project types in the sector due to underwriters airing hesitance following heavy losses.
Sources have pegged average hydro project increases between 200% and 300% over the past 12 months, following a number of losses since 2017.
Back in 2018, the construction market absorbed one of its largest-ever claims following the collapse of the Colombian Ituango Dam, which has cost insurers north of $1bn.
“Since it came everybody's scared about those [hydro] risks because it showed the potential high-risk quality,” one underwriter noted.
Swiss Re and Zurich are the leaders on the construction reinsurance policy on the Ituango Dam, a project hit by a series of landslides.
Capacity crunch
Heavy losses and a lack of profitability over a number of years led to carriers flooding out of the construction market and in turn caused a capacity squeeze.
Sources noted that at its peak, there was around 40 carriers underwriting construction globally, and this has since been reduced to around 25.
Howden’s Harrison-Sleap said: “Ultimately, more than 10 insurers ceased underwriting the construction sector. We estimate that this equates to the withdrawal of more than $1bn of construction market PML capacity since the beginning of 2019.”
As the cyclical nature of insurance goes, the withdrawal of a significant number of carriers has – along with recent losses – caused rates to harden and helped to bring the market out of a seemingly perennial state of loss making.
Insurers have also reduced average line sizes in recent times and are less willing to take anywhere near as high of a risk percentage that had been seen during the times of soft market conditions.
Marsh’s Desmond said: “Historically we’d see insurers take 40%, 50% of the risk – In the depths of the soft market, we’d even see insurers writing 100% themselves.
“Now what we’re seeing is instead of one or two insurers on a risk, we are seeing eight or 10 insurers. On some of the huge infrastructure projects, we will see nearly every market participating in that risk.”
Historically, insurers have been able to provide 100% of cover for a construction project, but due to capacity restrictions and carrier hesitance over high-risk projects this is no longer the case in some instances.
In the depths of the soft market, we’d even see insurers writing 100% themselves. Now what we’re seeing is instead of one or two insurers on a risk, we are seeing eight or 10 insurers
Andy Desmond, construction industry leader and UK industry leader at Marsh
Once source noted they have one client who has only managed to acquire 25% of the cover for their project due to the high-risk nature of the project – and they have been trying to get 100% cover for seven months now.
It does appear that limited new capacity is soon to be entering the market – possibly as a result of the construction market’s recent turn around in performance.
It was previously reported by this publication, that Lancashire is close to entering the sector, with WRB Underwriting’s David Chalk and Richard Ogoe set to join the carrier.
Following recent sizeable losses in the class, underwriters are also demanding that insureds must be prepared to increase their self-insured retentions (SIR), particular on the riskiest polices, such as hydro.
One underwriter noted that the SIR’s for hydro products on their book currently ranges from $500,000 to $1mn.
Furthermore, there are also less insurers willing to offer lead terms on polices, with a preference instead to take following terms.
The result is that there are only a handful of markets currently willing to offer lead terms, meaning they “can essentially push rates up”.
Typically, the percent of the policy written is no greater than 30% for a lead line and up to 10% for a following line, with higher minimum premium requirements for each share.
Inflation impact
Supply chain issues and inflationary trends has caused a proliferation in a number of material costs such as wood and steel, as the overall cost of materials looks set to continue to rise over the next few months.
This in turn has exacerbated the capacity issue as there is already a constrained pool of capacity that will be trying to cover increased insured values.
Moreover, any claims that do come in will be inflated and this will further threaten profitability.
“A project that used to cost a billion dollars now costs $1.2bn, which means there's more capacity needed for a project because the cost has gone up,” one underwriter said.
It has also caused precautionary rate inflation on some policies as underwriters try to predict future price inflation accordingly.
Clark Gardiner, senior underwriter at Ensurance, said: “The costings that are being put forward, depending on the project, are seeing 20% extra put on them just to cover material cost increases.
“And that's something that I've seen from a couple of people – for example, a project that they would have expected to cost £5mn is now costing £6mn.”
Moreover, construction demand is going to burgeon over the next 10 years, according to a recent Marsh report written with Oxford Economics, which expects construction output to grow by 42% globally by 2030.
As a result, the market could see rates harden further if there isn’t the capacity to follow suit.
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