A volatile claims profile and squeezed margins could drive more ‘value engineering’ by construction firms and an increased necessity to self-insure

Whilst the construction PI market might soften, the economic downturn could still see larger contractors opting to increase levels of self-insurance, whilst seeking to reduce project costs

The construction professional indemnity market is turbulent at present. The hard market of recent years (caused by widespread retrenchment following the Lloyd’s Decile 10 review and the flammable cladding scandal) may be coming to an end, with new capital potentially viewing the insurance market as a less volatile investment than equities.

During the harder market, carriers have sought to exert greater influence on policy wordings, historically controlled by brokers. If the market softens, whilst carriers may be forced to concede on price, they may seek to hold the line on exclusions and endorsements, This is particularly so as we anticipate what the claims landscape may look like over the next few years.

Margins are typically tight in the construction sector and, with the industry contracting due to increasing levels of insolvencies, the pool of recovery targets for insured losses is also shrinking, leaving the incumbents exposed to increasingly large losses. In harder market conditions, greater proportions of these losses have been uninsured, by virtue of higher excesses and more restrictive cover.

In terms of risk profile, as with previous recessions, contractors may increasingly deploy ‘value engineering’, seeking to claw back profit margins reduced through the inflation of material and labour costs during the lifecycle of a fixed price contract.  This opens up the possibility of further liability claims. Insurers will also be mindful of emerging risks.  Whilst the Grenfell tragedy has led to an overhaul of the regulatory requirements for the design approach to Building Regulation compliance, insurers will consider whether all thematic claims arising from the practices that predate this step change have yet presented.  For instance, concerns over the use of combustible pre-insulated pipes could be the theme of the next spate of industry wide claims.

For some construction professionals and contractors, the solution to these challenges might rest in mergers / acquisitions. The increased buying power of the merged entities presents an important dynamic in the agreement of insurance terms; they might also have additional options, such as the use of captive and other self-insured solutions, particularly if the insurance market does not provide a viable alternative.

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