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Product category: Building Industry Finance, Law and Insurance
News Release from: Heath Lambert Group | Subject: State of the Market Report 2008
Edited by the Buildingtalk Editorial Team on 14 February 2008

Heath Lambert 'State of the Market
Report 2008'

Current boom in major construction projects in the UK and internationally, coincides with a competitive period within the insurance industry.

As a result, capacity is plentiful, rates are still falling and insurers are keen to write construction risks However, climate change, new legislation and innovative design are creating new and different challenges for insurers and clients alike

Capacity and rates.

Construction is typical of those insurance markets where clients are on course to enjoy at least one more year of unexpected rate reductions.

Predictions of the market levelling out in 2007 and then hardening in 2008 have simply failed to materialise.

A few insurers have tried to talk up rates on specific business, but without success.

Instead, huge amounts of fresh capacity, mainly from Lloyd's, has boosted competition, and once again forced prices lower in 2007.

In addition to the arrival of new insurance capacity, reinsurers are also increasing their appetite for construction business, and at very competitive rates.

As long as these circumstances prevail, we see no easing of the downward rating pressure during 2008.

In our view, only a run of serious losses will reverse the current pricing trend.

Nonetheless, even though it remains very much a buyers' market, insurers still offer preferential terms to contractors with strong risk management processes, backed up by clear audit trails.

This is true of all areas of insurance to some degree, but probably more so in construction where underwriters demand very high levels of risk control and risk survey because of the nature of the business.

Underwriters will no longer tolerate insurance being used as a first line of defence - even by smaller builders and contractors.

They emphasise that insurance is in place to cover catastrophic and unforeseen risks, not routine losses which can be prevented by taking the appropriate risk management steps.

On the other hand, because of the soft market, less well managed companies will still obtain insurance, although they will not get the best terms and conditions available.

Nor will underwriters offer them long term agreements (LTAs).

We make a point of introducing our direct client base in the UK and overseas to their main insurers to establish a partnership approach.

This has enabled us to negotiate flexible LTAs for a number of clients, which offer both stability as well as access to the benefits of the current soft market.

Further to the changes in the UK market, additional concerns surround the move by many insurers to open new offices in Singapore to write Asian business, direct from this growing hub.

It is estimated that between 15 to 20 Lloyd's syndicates will have a presence in Singapore in the next 5 years or so.

We also see signs of this capacity being used outside the Asian markets.

A number of local insurers are now looking to compete against the traditional London Markets by writing risks outside their normal territorial limits.

These developments show the flexibility being introduced by the Asian markets in their desire and need to grow their businesses and the very competitive nature of the international construction market.

The Middle East markets have also shown a rapid increase in their available local capacity, with less business coming back into London than ever before.

Concerns.

Despite the generally benign market conditions, climate change and particularly flooding, especially after recent events in the UK, are background causes for concern in the construction insurance market.

Although the summer 2007 floods did not result in any large construction claims, they did highlight the growing risks from climate change.

The insurance market is discussing a code of practice to cover building on flood plains but has not yet come to any conclusions.

However, the media has raised doubts about the insurability of large sections of the UK's existing and proposed housing stock.

Those doubts could spread to industrial projects if insurers decide to decline cover after applying their flood modelling techniques to construction risks.

Another concern for the market is over health and safety standards as a result of the number of non-UK workers arriving to fill the skills gaps in the construction industry.

Insurers are worried that poor levels of English and different approaches to health and safety, could lead to more on-site accidents.

In response, contractors are reviewing their induction programmes and considering arranging English language lessons for foreign staff.

UK (and international) infrastructure and renewable energy projects.

On a positive note, the amount of UK Government spending targeted at construction projects guarantees a high level of activity in the coming years.

Apart from preparations for the 2012 Olympics in London, the Government is investing heavily in rail, light rail, roads, airports, the underground and housing.

Another very promising growth area is the increase in the number of renewable energy projects, both in the UK and internationally.

The next five years will see a huge rise in the number of renewable energy projects being undertaken around the World as well as conventional power and water desalination plants, as the demand for both energy and water increases in line with consumer demand.

In the UK, construction of a barrage across the Severn estuary is again being considered.

If given the go-ahead, this tidal power scheme would be the biggest civil engineering project ever seen in the UK, with a current estimated value of around GBP15 billion.

Wind power technology is also pushing the engineering boundaries in the form of bigger turbines, as are developments in solar power and waste to energy plants.

These projects will set considerable challenges for the insurance market in terms of size, design, innovation and risk management.

The Severn barrage, for example, will not only be innovative, but because of its size will also require all available insurance capacity.

On other large infrastructure projects taking place around the World, designers and architects are placing new demands on contractors and insurers as they strive to create ever more elaborate and iconic buildings.

However, insurers can be reluctant to cover design exposure, an issue which needs to be carefully addressed when arranging cover.

Specialist advice.

In the field of renewables, it is important to find a broker who is well placed to advise clients working on such prototypical engineering and construction contracts.

These include new technologies such as anaerobic digestion plants, fuelcells, biomass and bioethanol plants, all of which bring new engineering challenges.

Further to this, the Kyoto Protocol Targets are to reduce CO2 emissions by 60 per cent by 2050 and the growth of incentives such as Renewable Obligation Certificates (ROCs), Carbon Reduction Credits (CRCs) and Emission Reduction Units (ERUs) will ensure that these technologies are here to stay.

It is important to manage the implications of the new EU Environment Liability Directive, which substantially alters the exposures faced by contractors.

In the UK, the Directive applies mainly to Natura 2000 sites, in other words those which are important in terms of biodiversity.

Although the Government is still working out exactly how to apply the Directive, it has been in force since April 2007.

The aim of the Directive is to prevent and remedy environmental damage.

It imposes new liabilities on operators and changes the liability regime.

Crucially, if a site is contaminated, the contractor must remedy it without delay.

It also introduces new concepts of remediation; primary, complementary and compensatory.

We have an environmental specialist on our team to steer clients through this complex and changing area of liability and to recommend appropriate solutions.

Conclusions.

In conclusion, we anticipate that 2008 will be more of the same with further reductions in rates and increased capacity available for well managed and controlled construction projects.

The international and UK markets will continue to flourish, with more and more competition to build the largest, tallest or most innovative construction projects across all sectors, from buildings to infrastructure through to energy and utilities.

As a result, we can expect to see underwriters rising to the challenges of providing adequate cover through the provision of well brokered business.

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