We are pleased to confirm that we have secured the safe renewal of our construction scheme facilities for 2022/23. These facilities are negotiated in the insurance market each year and underpin the insurance arrangements of the bulk of our construction clients. The negotiations and resultant ‘schemes’ support the renewal of your individual PI insurance policies and set the tone and the insurer’s broad strategy for the year ahead.
We are acutely aware that our last two communications on this process brought with them difficult news. In the teeth of unprecedented turmoil in the insurance market, we fought to maintain as much stability in pricing and, just as importantly, in our coverage specification, as the market was prepared to provide.
This was a balancing act made all the more difficult considering the problems faced by others in the market, as reported on by numerous surveys published by the CLC, RIBA and the ARB, (amongst others). Although it has been far from easy, the vast majority of our clients have been afforded continuity of offering and service, escaping the more extreme reactions faced elsewhere.
That said, we recognise the clear challenges that our clients are facing with the current economic backdrop consisting of inflationary increases not seen in a generation, looming recession, a tightening jobs market leading to aggressive salary negotiations and interest rates on the rise. Most firms are continuing to view their PI renewals with some trepidation and with many raising questions about affordability in a market where fee levels stubbornly refuse to show an upward trend that a ‘model’ forecast would expect.
The 2022 Scheme Renewal – The Headlines
It is with this aspect in mind that we are pleased to report:
- Our facilities for 2022/23 continue with an unchanged panel of insurers. AXIS and Arch will continue to lead off our blue chip panels of quality insurance markets.
- Whilst we are taking the opportunity to tidy up some of the policy language, there are no material changes to the specification of coverage. Importantly, the FSN cover we have been able to secure for our clients is unchanged and continues to be amongst the broadest available for work undertaken today.
- And on pricing for 2022/23, we will see a return to individual risks being priced on their merits. In the round we expect firms to see flat to low-single digit rate growth, though there will be more flexibility in individual risk underwriting than in the last two years.
The position of relative calm we collectively find ourselves in has not been achieved easily. It is the result of a joint and collective effort – and our clients’ support has been critical in securing this relatively safe passage through what have been unchartered waters for the sector.
We recognise the upheavals the last two insurance years have caused. Those changes were, however, the absolutely necessary building blocks of today’s stability. Without the rating increases seen at previous renewals; without the reductions in insurers’ exposures for historical ‘fire safety’ work; without our clients trusting in us in the journey we embarked on; without all these factors, we wouldn’t have a scheme today.
We could – and many would – end this update here, but that would be to ignore the fact that there is still a uniquely complicated picture in the insurance market for construction risks, with many moving parts. Therefore, for those interested in understanding what 2023 and beyond might hold in terms of the insurance market perception and appetite in the sector, we offer the following thoughts as to what might lie ahead.
A Market Update
The insurance world rarely speaks with one voice. Divergent interests prevail and whilst that dynamic can be very healthy, it does make analysis, prediction and coordination challenging. Consensus on where the market is heading is less common than you’d expect, as is agreement on what factors will drive it and what individual insurers’ strategies relative to those factors will be. This variety of views and voices means that insurers’ appetites differ and we have certainly been able to use that to our clients’ advantage over the last few years, when looking to improve the range and quality of our insurance partners.
This ‘variety’ presents particular difficulty though, when forecasting what the medium-term future holds. Particularly when the wider political and economic picture is looking more unstable than at any point since 2008/9.
That said, there currently remains a reasonable consensus amongst market commentators that we need to closely monitor the following factors:
We have reported on this aspect in detail here. Although there are many moving parts to this problem, the net effect of heightened inflation is undoubtedly higher claims costs, as the bills to fix the claims reported to insurers increase.
Whilst the expectation is that inflation will return to something like the long-term average by the middle of 2024, there is obvious uncertainty around that prediction, not to mention the impact of another ~18-months of increasing costs. The headline CPI rate of inflation also hides a much higher rate of ‘construction’ inflation which has surged since 2020.
Inflation is already high on the agenda at every insurance company and the pace of its reduction will be closely watched by the market. A delay to ‘normality’ returning to the UK’s inflation rate will see insurers look at taking action to mitigate their exposures. This takes a number of forms, but in general we are interested in two areas where insurers can look to take action:
○ Underwriting – they can look to increase prices to reflect increased claims costs, especially where inflation remains higher for longer. Or they can ‘index’ up excesses or diversify their portfolios into areas with lower risk profiles.
○ Reserving – there will be a need to review reserving on open claims to ensure they keep up with inflation, particularly with construction costs rising very significantly above headline inflation. This aspect requires careful monitoring to ensure any increase is fair and justified.
The flip side of this picture, however, will be just what happens to interest rates as the UK and other countries respond to inflationary measures. A move towards higher interest rates ought to mean insurers’ investment income increases too, offsetting the increased claims costs. Just how the scales tip on this balance will likely be a key factor in how the market fares.
The fire safety litigation
We have written extensively about this issue over the last 5-years and from a variety of angles. Today, all we would say is that next year, most likely in the Autumn, the Grenfell Inquiry will finally conclude, and Moore-Bick’s final report will be released into the public domain.
The market sentiment is that his findings will potentially have a significant impact on the nature and extent of the liabilities attaching to everyone working in construction on projects up and down the UK. Towards the end of next year and through 2024, we can expect to understand much better whether the £billions that have been reserved for fire safety problems are equal to the task of meeting those liabilities. Understanding this critical point will do much to address the question as to whether the storm we have experienced over the last two years has passed, or whether at this particular moment, we are in the ‘eye’. It is our team’s collective belief that much will turn on Moore-Bick’s findings.
For our part, Griffiths & Armour, in conjunction with our industry body the British Insurance Brokers’ Association and other construction industry bodies, continue to lobby Government on appropriate interventions in the PI insurance market.
The Building Safety Act
The detail behind this seminal piece of legislation is still yet to be revealed. We know already of the changes to the Defective Premises Act (DPA), which now impose liabilities going back 30-years on all those involved in designing and constructing dwellings. This unprecedented increase in the period which firms might find themselves subject to action has spooked both the professional firms themselves and those insuring them in the PI market, but there is significant uncertainty just what practical impact this will bring.
At a more fundamental level, we don’t know to what extent the Act’s main aim, a change in industry culture, will be successful. Just how will industry organise itself to respond to the transformational changes implicit in some of the requirements? There is a ‘chicken and egg’ element to this: does the Act require culture change to be successful, or will the Act itself change culture?
At the moment, the insurance market probably regards the Act as piling short to medium term problems on them – in the higher than expected claims under the DPA – but with the clear potential to have longer term advantages if the culture change that Hackitt focused on when setting out the principles behind the Act happens.
A key component of that change is a redistribution of risk and reward throughout the supply chain. We collectively need to seize the initiative behind the Act and put in place a better environment for everyone designing and constructing the built environment. We expect in 2023 to continue that work, by working with like-minded individuals and organisations – with our clients, professional bodies, major procurement entities and Government – to try to create a workable blueprint for positive change in the sector.
We hope that this brief overview of the significant issues likely to be driving the insurance market in the coming months is helpful. Should you have any questions or would like to discuss any aspect in greater depth at this point, then please do contact your usual account handler.