Underwriters battling to restore profitability in the hardening construction PI sector

More firms are withdrawing from writing professional indemnity policies in the construction sector, according to a report published earlier this month.

The report, published by insurance placements and disputes firm Mactavish, shone a light on poor underwriting results and sustained losses in the sector last year.

The cost of claims in the sector has been increasing in recent years as construction projects involve more stakeholders and become more technically advanced. As the risk increases the report states that levels of cover and the number of underwriters offering cover have fallen sharply.

However, as the report shows signs that the market is hardening and premiums increasing, for those still writing the risk they say that amid the difficult market there are still opportunities to make a profit.

Mark Brundell, head of professional indemnity at Zurich, told Insurance Times that the challenges presented by the construction sector were identified years ago by his department and actions were taken. Brundell said these actions were now starting to return a profit in certain segments.

In areas of construction where actions were taken more recently in 2017/18 though, Brundell said it would take longer to achieve a turnaround to profitability. Nevertheless, he was optimistic that for the right risks there are still opportunities.

“Whilst there are still some significant challenges ahead, we are confident that with the right risk selection, capacity deployment and control of the underlying structure and terms together with adequate pricing, those challenges can be managed,” Brundell said.

“Overcapacity and rate reductions for the best part of a decade have had a significant impact on the market and cover has widened significantly during this period.

“For the UK, the challenge going forward will be the interpretation of changing ambiguous building regulations and the lack of profitability in the sector itself.”

Pricing

The Mactavish report stated that construction firms were under threat from premium increases of up to five times and excesses or deductibles going up by a factor of three to four.

But Brundell said pricing changes in the sector were bringing the pricing level back to where it should always have been, due to 10 years of steady claims inflation.

He added: “In light of the government’s clarification on building regulations and the uncertainty it has caused, premiums may need to increase substantially more.”

Charles Manchester, chief executive of Manchester Underwriting, said until prices reach a more sustainable level his MGA would avoid writing heavier risks altogether.

“Rates need to be higher yet if we’re going to think about writing the heavier risks but there are opportunities for us out there, particularly in the smaller project sector,” Manchester said.

He agreed with Brundell that a hardening of the market was overdue, but said there was “still a long way to go”.

“Rates in the construction industry sector of professional indemnity have spiralled downwards over the last decade – even for the heavier risks – whilst the claims environment has got ever tougher,” Manchester said.

“All of this has led to a hardening in the market with a contraction in capacity, particularly for the more hazardous areas such as cladding, civil and structural engineering, high rise and larger projects.

“And a contraction in capacity leads to fewer players, lower line sizes, more limited wordings, higher premiums and higher excesses.”

Cautious

Manchester, whose first job was in writing construction classes, said rates were currently at a third of what they were 30 years ago, and that this currently made the risk unappetising to many underwriters.

However, he highlighted that this did present greater opportunities for firms, like his, which decided in past years not to soften rates in line with the market.

“At Manchester Underwriting, we didn’t follow the herd as the market softened so avoided the problem areas when rates were so soft,” he said. “We’re still writing construction industry professional indemnity risks. Not surprisingly, we’re seeing a lot of them.”

Allianz claims it is committed to supporting the professional indemnity construction sector, but it too is selective in the risks it takes on.

Stuart Toal, casualty account manager at Allianz, said the insurer would underwrite generally claims free risks through brokers who have the ability to purchase excess layers of cover.

He recognised that major losses in construction were driving other insurers out of the market, and suggested this cautious approach could become a long-term feature of writing risks in this sector.

“Market performance in this sector has worsened, leading to some insurers taking corrective action or leaving the market,” Toal said.

“Challenges have been driven by events such as Grenfell, which has resulted in insurers being more cautious about risks and potentially the effects of this will be long-term while the review reaches a conclusion.”