Insurance Brokers | Griffiths & Armour

Statement to Office of Government Procurement
PII market perspective

Thank you to the Office of Government Procurement for facilitating today’s discussion. Given the current challenges on liability and insurance, I think it sends a very positive message to the insurance market that there is a willingness on the part of clients to engage, in what is fast becoming, a societal problem.

I don’t think we can over-emphasise the seriousness of what is happening in the PI market and the impact that is having on consultants and contractors. Daily, we are encountering firms who have been unable to source insurance protection; I have no doubt that some are now operating without insurance, which creates risks for parties beyond themselves, and in the absence of finding a solution, certain businesses will be forced to close and clients left unexpectedly exposed.

It is important to say that this is not solely an Irish problem. The challenges are global, there is only so much that we can hope to influence but we need to consider how we create conditions to attract long-term insurer support. In that sense, the answers are not necessarily to be found solely in the insurance market but also in the operational and liability framework that exists within the construction sector.

The Insurance Market

In terms of background, the issues are as simple or as complex as we choose to make them. At a very basic level, there simply isn’t enough capacity within the insurance market to deal with the level of demand; whether that is the number of firms seeking PI insurance or the amount of cover they are looking to hold.

That lack of capacity is down to a range of factors but the underwriting appetite is ultimately a reflection of market performance. Anyone involved in arranging PI Insurance will recognise that the market has been subject to too much pressure for too long. Whichever features of the PI landscape you consider important, the pressures have been there;

  • Pressure to reduce pricing;
  • Pressure to broaden coverage;
  • Pressure to reduce excesses; and
  • Pressure for increased limits of indemnity.

As an industry, we need to acknowledge that much of the pressure was influenced by wider economic factors with an ‘over-supply’ of capital in insurance which resulted from reduced returns in other areas. This supply-side surplus coupled with ever increasing commercial pressures between market participants contributed to less underwriting discipline.

As the effects of that relaxation of discipline have become manifest over the last few years, there has been an exodus of capital and this in turn has led to several Insurers withdrawing from the market. Those remaining are subject to increased internal scrutiny and this is reflected in:

  • The number and percentage of risks they are able to underwrite;
  • The limits of indemnity and excesses they are in a position to support;
  • The levels of premium they are required to charge; and
  • The restrictions in cover they are seeking (or are required) to impose.

Construction PI

As a sub-set of the wider PI market, construction PI has always presented a particular set of challenges. Liabilities are notoriously long-tail and quite often, a very small number of claims can determine the performance of an insurer’s portfolio or the market as a whole.
This is not peculiar to Ireland but there is increased volatility given the relative scale of the local market, the impact of larger claims and the risk of aggregation, where insurers may be insuring several parties on the same project.

Historically, we have also been reliant upon UK Insurers to provide capacity. Brexit and the removal of passporting rights will present some challenges, and perhaps ultimately a further reduction in supply, but Ireland is also often seen as ‘a difficult place to do business’:

  • The time and cost associated with defending claims;
  • The potential for multi-party actions; and
  • The lessons of the last decade and the impact of the Civil Liability Act (the 1% rule).

Building Control Amendment Regulations

On a positive note, the Building Control Amendment Regulations (BC(A)R) seem to have led to a general improvement in standards and have begun to address many of the issues that the UK are still wrestling with.

Procurement and risk -v- reward

At the same time, the perception is that there remains a ‘risk dumping’ mentality in the public and private sector. At present, many describe feeling that there is a significant and growing imbalance between risk and reward, which is evidenced through:

  • Continued pressure on professional fees (which form the basis for premium calculation);
  • Increasingly onerous contractual terms;
  • The imposition of unlimited liability;
  • The absence of net contribution clauses / proportionate liability;
  • Demands for higher limits of indemnity and lower levels of excess.

The imposition of unlimited liability by Government is difficult to defend and potentially sends a dangerous message to the private sector about the terms that contractors and consultants should be required to accept.

Ultimately, employers cannot continue to drive risk down the supply chain to parties who are unable to control, absorb or insure the exposure without there being real consequences – it will result in the failure of businesses and it leaves all parties potentially more exposed and without the ability to manage those consequences. A massive game of ‘chance’, if you like.

Insurance requirements

Similarly, requirements for PI Insurance must be sustainable and take account of what is likely to be achievable long-term within the insurance market. Going forward, capacity constraints mean that contractors and consultants are unlikely to secure the high levels of cover and low levels of excess that we have become accustomed to. Where cover is available, there will be serious issues around affordability.

These considerations are not revelatory. For example, we would suggest that the guidance produced by the Department of Public Expenditure and Reform in 2013 should simply be updated to reflect market conditions and should be given greater weight as a guide to what is reasonable and acceptable.

Current constraints on levels of excess are curtailing insurers’ ability to properly underwrite and further restrictions in cover need to be accepted as part of a fairer allocation of risk. PI Insurers cannot be expected to provide a catch-all solution for project risk and a conversation needs to take place about restrictions that are reasonable, proportionate and designed to ensure the future sustainability of the sector.

Next Steps

2021 will bring further challenges for the construction PI market. Those Insurers remaining within (or entering) the market are doing so at a time of real uncertainty, when we have yet to fully understand the implications of Brexit and Covid-19 for the insurance industry. Those factors will also directly impact the construction sector and the wider economy and history tells us that PI claims are typically contra-cyclical.

As a result, it may prove even more difficult to encourage insurer participation but there are actions that can be taken now to alleviate further capacity constraints and deliver a positive message on risk allocation. These might include:

  • A reduction in levels of PI cover required and the introduction of a corresponding limit on liability.
  • Greater flexibility on the level of policy excess within an agreed set of parameters.
  • The introduction of a net contribution clause within conditions of contract.
  • Continued engagement with the insurance market and an acceptance of restrictions in cover that are reasonable and proportionate.
  • A move away from single point design teams and the requirement for consultants to engage specialists in perceived high-risk areas.

Consideration should also be given to alternative means of insuring project risk. The current approach of requiring all parties to maintain high levels of PI cover is eroding capacity within the insurance market and leaving the State entirely dependent upon annually renewable third-party insurances. This reliance on liability policies does not deliver certainty or value for money; it is simply exacerbating the insurance problem and escalating project costs.

As mentioned at the outset, I think today’s meeting sends a very positive message about a desire to change. Responsibility for the challenges we’re facing does not rest with any individual party and it is not a question of apportioning blame – it is about recognising a shared responsibility to work through the challenges and establishing a framework that can work into the future to provide a more resilient model.

Graeme Tinney
3rd November 2020