The adoption of BIM should lower project risk and, in theory, that should lead to lower insurance premiums. So why does the direction of travel seem to be in the opposite direction?
The construction insurance market: the view from the brokers
Jon Land, broking director, Romero Insurance
In the last few years insurance has been extremely competitive. You’ve had a lot of new entrants into the market and that has driven premiums down. So while the companies have been having a tough time, everybody knows that they’re looking for savings because they need to reduce their costs. I know that’s the case normally, but it’s been driven to a new level at the moment.
So premiums have been driven lower and lower and lower and what we say to clients is that they’re almost in a false position. The premiums that they’ve got used to aren’t sustainable and the market will change for companies with poorly performing risk profiles in the next couple of years. Unless they get that claims history right their premiums could escalate dramatically overnight. If you’re making claims you will pay more than your claims at the end of the day: insurers ultimately need to make a profit.
Insurers have been saying for some time that the market will harden soon. It still hasn’t fully hit us
At the bottom of the market as we are, what we’re trying to do is manage these risks now to help mitigate for when the market hardens. Otherwise people are going to get some very big increases in their premiums. Insurers have been saying for some time that the market will harden soon. It still hasn’t fully hit us, but what I would say is that what we’ve noticed as brokers is that very poorly performing risk profiles are starting to be harder to get competitive premiums for.
One of the other big factors for insurers when they decide on a premium is a company’s claims experience. We can look at the claims experience as it is and analyse it for a client. Often you can find that something has happened that is fairly major on paper, but when you actually speak to the client maybe they don’t actually carry out that practice anymore and it wouldn’t happen again. Alternatively if a client does have a problem and puts in place measure to deal with it, our job is to get into that, learn about it and communicate it to the underwriter. We’re trying to mitigate any increase in premium that results from those claims.
That’s where our risk management team comes in. We can put in place a plan to deal with any problems a client has had and then go to the insurer tell them about the measures we’ve put in place. A lot of insurers will work with us on that and say that if the client and we as the broker will commit to doing that work they will take it into account with premiums going forward.
We’ve taken some clients with very poor risk profiles and turned it around. It doesn’t happen overnight but it can be done. If you took an extreme example, there are certainly cases where premiums have come down by 30-40%. I think that any broker that does not do risk management these days cannot claim to be providing a full service.
Stephen Hegarty, client servicing manager, BJP Insurance Brokers
From an insurance point of view premiums will reflect the growth of the construction sector. So the only real hope of increased premiums is when we do see growth in our clients rather than rate increases being imposed. Funding from the banks has been very stunted over the last few years. I can’t see anything changing in that. Lending fuels growth of projects and therefore premiums.
Then there’s the fact that smaller contractors are still struggling to get money out of main contractors. That’s still sending a lot of firms out of business. On the other hand, we are starting to see major infrastructure projects such as Crossrail and HS2 really making a difference in terms of providing a lot of work in the long term for the major contractors.
There are a lot of insurers in the sector who are effectively buying business in. If somebody wants cheap insurance they can get it.
I think that in the insurance world we would always love for the market to harden, but I don’t think it will harden that quickly. I think that it will squeeze up rather than shoot up. There are a lot of insurers in the sector who are effectively buying business in. You’ve got insurers coming to year end and having fire sales. And then there are a lot of unregulated, unrated insurers around as well. There are some off-shore based insurers that tend to be very cheap. If somebody wants cheap insurance they can get it.
So, insurers will be very careful - nobody wants to lose market share. The last time that the market hardened it hardened very quickly. The insurance companies blamed a lot of factors like the stock market not performing, 9/11 was pulled out of the bag (?)… It was a perfect storm. That was around 2002/03. The impact was extreme with premiums doubling or trebling in a year.
I think that we’ve almost gone full circle and that after eight or nine years of a softening market we really are scraping the bottom. But there are still people buying business in, so unless everybody jumps at the same time I can’t see the market hardening dramatically. It has always been such a price sensitive sector. We’ve always had to be on point premium and cover wise. It is very difficult to sell better cover for a higher premium. You’ve always got that negotiation about price high on the agenda.
So, it’s still very much a buyer’s market and will be for as long as there are insurers willing to compete at the lower end. I think that we will see a steady increase, but I don’t think that we’ll see massive increases. There are just far too many cautious lenders around and I can’t see that changing.