Insurance market must deal with escalating construction risks

Insurers and risk managers must pull out all the stops to support the beleaguered UK construction sector, which is facing extreme pressures post Brexit.

The recent crisis events, including the pandemic and the war in Ukraine have had a particularly negative impact on the construction sector across Europe, however, while some other countries are bouncing back, the UK is floundering.

We are an insurance buyer and, from talking to construction clients, we know how concerned they are. But, we must take decisive action and that means ensuring businesses are as well placed as possible to take on these challenging conditions - and that means ensuring they are well protected by their insurance. The UK’s construction sector has shown it can weather severe storms, but it needs proper support from the insurance industry, as that will boost resilience and see them through these extreme conditions.

A steep rise in risk is adding to the rising cost of insurance for construction firms. Overall, Mactavish has noted that UK insurance prices have doubled since 2018 (or increased by four times for some classes like D&O or Professional Indemnity), with these insurance cost increases significantly higher in the UK than for international counterparts. Since the UK left the EU, the price of commercial insurance in the UK has risen by over 100% compared to a 60% rise across the rest of the world.

Severe labour shortages – too few people pushes up risk

Labour shortages are causing serious problems for the construction industry and raising risks.

When there are too few workers, there can be greater likelihood of accidents, which could lead to more liability claims, fines and intervention by the HSE. Insufficient numbers of workers can also lead to delays, errors and the potential for contractor insolvency.

EU workers leaving the country because of Brexit have caused major difficulties on building sites up and down the UK. Over one in three construction firms (36.3%) has said they were dealing with labour shortages. (Office of National Statistics November 2022). Further, construction is the second worst affected sector in terms of worker shortages - with nearly 21% affected (hospitality is number one at 35%) according to the House of Commons UK Library.

Material shortages and supply chain delays

As with labour shortages, not having enough materials increases risk, in terms of delays or in some cases, where lower or less suitable alternatives are used. Timber, steel and concrete, along with tools and machinery, are all impacted.

Some European suppliers may be more willing to provide goods to other EU partners to avoid the increased checks and uncertain regulations resulting from Brexit. The shortage of lorry drivers had a further impact. Further, the domestic HS2 and Hinkley Point C projects have also used up vast amounts of concrete, which has caused a negative ripple effect on other works.

Mortgage woes increase the risk of market slowdown

Private housing remains the largest construction sector, which means more expensive mortgages and falling wages make buying property less attractive. According to the Bank of England, the number of mortgage approvals fell to 35,600 in December 2022 from 46,200 for November - the fourth monthly consecutive fall. 

For insurers, there will be a concern about more empty properties and the fact that developers and contractors will have more pressure on their balance sheets, as well as uncertainty over whether insurance policies cover completed but unsold stock.

A troubled sector is a threat to health and safety standards  

Financial pressures across the construction sector are likely to lead to poorer health and safety standards. This is linked in part to labour shortages and more reliance on inexperienced workers. For insurers, there will be concerns that businesses they insure could be cutting back on their health and safety programmes which could lead not only to claims but also to associated disputes arising from alleged policy breaches or non-disclosure.

The Post-Grenfell market – changes proposed as risk environment remains highly uncertain

The Grenfell Tower disaster has led to a major remediation programme to remove dangerous cladding and improve fire safety across the sector. For insurers, there are huge numbers of claims in the pipeline connected to cladding and other risks connected to building materials. This remains an unfolding picture as the government and regulator seek to ensure insurance remains affordable to leaseholders and to eliminate bad practices in the market, such as where excessive commissions have been charged.

There is also new legislation and a need to adapt to new building regulation standards.

This exists in the Building Safety Act 2022, which is hugely significant for the sector covering various aspects of design, construction, occupation and workplace safety.  One key change of this Act is in requiring companies to revisit a wide range of their compliance policies and potential reallocation of liability between parties, in particular in relation to cladding and fire risk and the large number of existing disputes and insurance claims in this area. 

Insurers and brokers must support construction clients

The raft of new and evolving risks and ongoing cost pressure on insurance is particularly bad news for the construction sector. Under insurance due to inflation is now incredibly common and could prove disastrous in the event of any claim, whether large or small

Some firms may not realise that they are now under-insured and this is why we are doing everything we can to raise awareness of the situation. We are also calling on insurers to help in ensuring they play their part in supporting companies in pragmatically addressing revaluation needs rather than simply including punitive policy terms.