In early February, the UK government announced it needed a further one million homes in the UK by 2020 and at the same time infrastructure development is picking up pace. Here, we take a look at the world of construction and the implications for insurers
Construction output in the UK is set to increase 13.2% during 2017, according to the latest forecasts from the Construction Products Association, with infrastructure a core part of the country's long-term economic agenda since 2010.
However, in its 2016 Confederation of British Industry (CBI)/AECOM Infrastructure Survey, the CBI found confidence that overall infrastructure will improve in the coming five years has fallen 16% since the 2015 Survey (from 43% to 27%). A significant majority of firms are not optimistic that infrastructure in aviation (74%), energy (73%) and roads (69%) will improve, with only digital bucking the trend (59% of companies expect improvements in this area). Moreover, the majority (64%) of firms feel the UK is unlikely to be more internationally competitive in 2050 than it is now and 46% are dissatisfied with the current state of their local infrastructure.
Carolyn Fairbairn, CBI director-general, said: "Announcements and commitments are one thing. Seeing tarmac, tracks and super-fast internet cables being laid is another. It isn't right that nearly one in two firms are dissatisfied with their region's infrastructure, or that confidence in the future is running low, especially when it comes to delivery -- the key piece of the infrastructure puzzle."
FIVE COMMON INSURANCES ON CONSTRUCTION PROJECTS
- All-risks insurance: covers physical damage to the works and site materials. It may be taken out by the contractor or the employer and the parties should specify who is responsible in the construction or engineering contract. The contract usually details the specific insurance requirements, for example, which risks must be insured against and the amount of insurance. Whichever party obtains the insurance, the contract often requires it to be maintained in the joint names of the employer and the contractor.
- Professional indemnity insurance: insures against liability arising from professional negligence. This usually includes a contractual liability that is equivalent to professional negligence, such as a breach of a contractual obligation to exercise reasonable skill, care and diligence when carrying out design. Architects, engineers, other professional consultants and a building contractor that owes a design responsibility to its employer are usually required to maintain such insurance.
- Product liability insurance: protects against liability for injury to people or damage to property, arising out of products supplied by a business. Suppliers of equipment to a construction or engineering project, such as lifts or escalators, may be required to maintain such insurance, sometimes in place of professional indemnity insurance.
- Public liability insurance: covers liability arising from death or personal injury to third parties other than the insured's own employees and for damage to property belonging to third parties.
- Latent defects insurance: (also known as decennial insurance) typically lasts for 10 years from the original construction of a building. A building owner must usually arrange the cover in advance and it typically protects the owner against the cost of remedying the structure of a building, due to a defect.
Key to delivery is the supply of insurance to support the projects, be they large, government-run infrastructure projects or small housebuilding schemes.
However, it seems the insurance market has failed to keep pace with the construction sector.
A recent roundtable event in London between independent insurance brokers, Lucas Fettes & Partners and Constructing Excellence, the organisation charged with driving the change agenda in construction, revealed that as the construction sector changes, insurers are finding traditional products and underwriting techniques are in danger of becoming outmoded.
The group found that, while many acknowledge the need to change, acting on it is a huge challenge and the development of new approaches can only happen if there is effective collaboration between clients, investors, contractors and the insurance industry.
Building information modelling (BIM), new design and construction technology, a shift towards premanufacturing and offsite building, a shorter lifespan for built assets and improved data all have ramifications -- presenting opportunities and challenges in equal measure -- for those who construct buildings, those who finance them and those who manage the risks. Several key themes developed as these issues were discussed.
Key insights included:
- On any given project, there are multiple insurers underwriting the same risk, resulting in significant overinsurance and driving behavioural norms towards a litigious rather than collaborative approach.
- An insurance product that caps out-turn costs could take away the potential for conflict by looking at how much can be priced in instead of out of cover. Success requires a shared commercial interest.
- Connectivity and the Internet of Things may bring about an insurance product that extends beyond the build project and into the operational lifecycle of the building.
- BIM creates the availability of tools to provide information -- management information is readily accessible on a tablet or in app form. New technological underwriting techniques will be a major disruptor, making it possible to bypass traditional means of insurance.
- Technology is only ever an enabler. The maturity and competency of the client is critical. What is their track record? Do they have the right leadership? How much do they care? Just how invested are they in the project? Businesses that derive the most value will be those that invest in building BIM into their transformational programmes, such as health and safety and human resources.
- Data is now far more valuable than the physical assets that underlie it. Competitive advantage does not come from holding on to your own data, but from sharing and pooling data, then competing on the ability to analyse and get value from it.
- Underwriters must have a joint seat at the table with a client. Brokers have traditionally enjoyed being able to control the relationship but, now, a good broker will allow the insurer to get in front of the client.
Many of the insights are mirrored by recent comments from broker JLT. Launching Constructive Insight, JLT Construction's regional placement leaders report continued competition, the decentralisation of traditional market centres (including London), a continued surplus of available underwriting capacity and the relatively benign catastrophic claims environment globally have resulted in premium rates continuing to fall.
It notes: "Without doubt, market pricing levels are as low as they have ever been but the question remains as to how the market can sustain these levels. We continue to hear talk of the market moving towards price increases but, in reality, this prediction has yet to see any level of traction. Our short- and long-term view is that this situation will remain."
JLT provides top tips for insureds looking for cover but has a warning for the market: "Insurers continue to deliver satisfactory underwriting results, though it is believed that the absence of catastrophic casualty loss events is disguising the inadequacy of current rates and their longer-term sustainability. Recent merger activity may be a sign that some insurers are consolidating their position in what they perceive as a challenging environment."
KEY UK PROJECTS
£18 billion Hinkley Point (Somerset) -- Nuclear power station construction
£1.5 billion A14 (Cambridge) -- Road improvement scheme
£50 billion High speed rail infrastructure
£4.2 billion Thames Tideway (London) -- Sewer infrastructure
£14.5 billion Crossrail (Reading and London) -- Rail improvements
£700 million Flood and coastal erosion risk management (UK-wide) -- Flood defence programme
INSURANCE TICK LIST
Other insurances builder, contractors and investors may need to consider include:
- Employers' liability
- Business travel and personal accident
- Directors and officers liability insurance
- Excess liability
- General liabilities
- Kidnap and ransom
- Mergers and acquisitions
- Political risks
- Professional liability
- Supply chain finance
- Trade credit insurance
- Crime insurance
- Employment practices liability insurance
- Environmental impairment
- Expatriate care
- Liability protect
- Motor fleets
- Trade finance