Construction Material Damage Insurance Market Update: January 2025

Construction & Development Market Update

Jonathan Frost

Market conditions have continued to improve over the last 6 months. Capacity is returning and appetite from local and international markets has improved renewal outcomes for policyholders. Premium rates have stabilised, with some reductions achieved where a desirable risk is presented to the market. Insurers continue to closely monitor and review risk management policies and procedures. Contractors with lower hazard activities and positive claims records are preferred by insurers, and this is reflected in the terms and conditions achieved for those clients. This is particularly prevalent in the SME space, where appetite and competition in the sub $10M turnover contractor market is being driven by new market entrants and existing markets vying for what is considered lower risk business.

Australian insurers, underwriting agencies and Lloyd’s of London continue to seek shared project risk placements. This is preferred to being exposed to a full limit loss on both single projects and annual placements where clients require a larger limit, leading to a longer lead time for advisors to negotiate consistent coverage on placements. Underwriting information is analysed in detail across the commercial, industrial, and residential sectors.

As per our recent article, underwriters continue to be disciplined in respect of applying policy sub limits on renewals to reduce their exposure in the event of a loss. Advisors and clients need to consider their actual exposure to ensure insurance cover is adequate for their specific needs. In softer market conditions insurers were willing to accept a simple percentage of sum insured to apply to sub limits, however, they now wish to discuss the exposure prior to releasing such additions.

There continues to be a shortage of experienced underwriters in the market, leading to an unfulfilled demand for talent in the industry, which is likely to continue in the medium term, and could further trigger underwriter movements between insurance providers.

Whilst the local insurance market remains more competitive than Lloyds of London, this is beginning to shift. Recent pricing and terms received from overseas markets are much more closely aligned to local markets which is a clear signal that Lloyds will become a bigger threat to local carriers. Lloyds are also supporting construction facilities for new MGA’s to deploy capacity to the local market. Again, the unavailability of experienced underwriters could lead to poor performance – time will tell.

High rise residential construction

Increased activity in this sector continues. Developer and contractor experience is one of the key underwriting considerations and an ability to demonstrate experience on similar projects, project history, operating history, company structures and use of contractors/consultants are all assessed as part of insurer reviews.

iCert ratings are also considered in a positive light by some insurers, though obtaining such a rating only provides insurers with confidence in the financial stability of the contractor and does not replace the need to demonstrate sound risk management.

Structural defects insurance (or LDI) has not experienced a great take up by the market. The limited cover offered suggests that contractors believe they can manage such risk through improved business practices and have not seen any particular need for the additional expense of this cover. Reforms and the scrutiny of the building commissioner of poor work practices in NSW has provided insurers with more confidence in project delivery.

We expect continued enforcement action by regulators (particularly in NSW) to continue quality improvement across the sector. Insurers have suggested that many current projects are seeing increases in overall construction costs and delays in completion.

Contractors should ensure that they carefully consider their project timeline when approaching the market to avoid significant additional costs associated with policy extensions required due to delays in completion. We have noted many single project delays due to longer construction lead times, and in particular delays by regulators in issuing Occupation Certificates. This can lead to a delay between actual completion and the end of the policy period. In this scenario, insurers are effectively exposed to a 100% loss whilst the building is vacant awaiting the occupation certificate so strata insurance can be arranged. This necessitates extensions to cover and additional premium costs. See our article here for further detail.

Insurers have definitely improved their attitude to this sector and are showing a greater interest in these projects over the past 6 months, and we expect this to continue.

Insolvency risk

Market speculation suggests that insolvencies in the construction industry will increase in 2025. Insolvency continues to be an active consideration for insurers. Material damage insurers would, in the past, rarely perform financial due diligence on proposers. However, such due diligence has now become a standard procedural task during the underwriting process with insurers asking for details of project status, particularly around delays in completion, as well as detail regarding costs escalation.

Infrastructure projects

Major infrastructure projects are underway at both state and federal levels, with road projects involving tunnelling and major static infrastructure projects in the pipeline.

Most of these projects continue to be placed on a principal arranged basis, with cover being placed on behalf of the contractor by the State Authority. This has often meant that the market is pricing a risk prior to knowing which contractor (or joint venture) has been awarded the contract. Insurers are therefore looking at the risks associated with the project in more detail given they are unable to fully underwrite the contractor undertaking the works.

Subcontractors are becoming more aware of the existence of principal arranged policies and seeking contractual indemnity under these policies. Whilst this is usually readily available to the subcontractor, often the deductibles on the primary policy are likely to be significantly higher than the subcontractor is accustomed to (or able to) pay. We have seen instances of deductibles exceeding $750,000. This often means the subcontractor will still wish to indemnify under their own policies on larger projects (and therefore pay full premium for ground up cover).

The complexity and value of infrastructure projects continues to increase. Insurers are taking a more conservative approach in capacity deployment, which will mean a greater number of insurers will be required to complete these project placements, and generally requires capacity from both local (Australian) and international (Asia and London) insurers to complete the placement.

There has also been a renewed use of alliance contracting for complex projects. Whilst insurers are generally supportive of such contracting arrangements, it is important to engage with your advisors and the market early should alliance contracting be under consideration to ensure there are no significant issues from insurers in relation to the specific risk profile. Further information on alliance contracting can be found here.

Civil projects

Given insurer focus on weather related perils and the shift in atmospheric conditions to La Niña, insurers are taking a more stringent line on civil projects generally. Contractors in this sector will need to provide detailed weather management plans and risk mitigation strategies for underwriter’s review. Consideration should be given as to whether single project policies provide more opportunity to tailor cover and price to the specific geographical conditions and peril profile of the work site.

Water damage

Claims for water damage continue to rise in both frequency and value on insurers’ loss records, often arising from burst plumbing causing damage to the works under contract. Insurers are now asking for detailed risk management plans as part of submissions by contractors. Contractors are now expected to have a water management plan, and on larger projects physical water damage prevention measures to avoid the escape of water from new plumbing fixtures.

Project delays

We are observing significant delays in completion on projects generally across our client base. These delays are due to various factors including availability of trades, material shortages, regulatory (council) delays and weather-related delays. Insurers are generally happy to provide extensions to cover to accommodate such delays, but at a cost. Whilst this cost is usually a reflection of the original premium charged (on a pro-rata basis), it is often unexpected and unbudgeted. Policyholders should closely monitor their project timelines and consider whether annual policies with a blanket extension to the construction period should be sought (even if it comes at some premium loading) rather than seeking to extend cover following a delay, as often this approach will result in a lower cost overall.

It is also important to keep your insurers advised of any cessation of work (where such period exceeds 30 days) or where the project is complete but cannot be handed over due to the council not having provided Occupation Certificates for the works. In this case insurance remains the responsibility of the builder, but the insurance policy will have likely ceased to provide cover. More information can be found in our article here.

Insurer selection remains key for the medium-term strategy of construction firms. Bellrock recommends partnering with a stable insurer and to seek enhancements to coverage and improved premium rates in the medium term by demonstrating sound risk management and low claims volumes as market conditions continue to improve over the next 12 months. Our experience suggests reductions are achieved as market conditions improve without the need to break a long-standing relationship. Often the incumbent insurer will meet the market on pricing where they wish to retain good quality construction business.

Finally, we continue to see delays in responses from insurers, due to the volume of their workload and the shortage of experienced underwriting individuals. Contractors need to provide comprehensive information and allow enough time for options to be explored. It is difficult to obtain competitive, comparable pricing from the market unless there is enough lead time to engage and negotiate. Engagement with the market at least 2 months prior to expiry (even if this is without updated renewal information) is imperative to the renewal process to ensure potential markets are identified and are resourced to assist when presented with an underwriting submission for consideration.

Your Bellrock Advisor can help optimise your construction insurance strategy amid evolving market conditions. Contact an Advisor today

 


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