Construction all risks (CAR) is a widely used term that describes the insurance used to protect employers, contractors or subcontractors against risks of physical loss or damage to constructed property, prior to practical completion.
Recent years have seen significant volatility between supply and demand within the UK CAR insurance sector.
The decade-long trend of increasing claims, which reduced insurer supply and led to increased premiums, has now given way to a much more buyer-friendly environment.
This has resulted in reduced premiums, a widening of coverage, more flexibility on policy excesses and a greater focus on differentiators such as insurer service.
Nonetheless, while pricing is currently moving in the policyholders' favour, the market is not without its headwinds and continues to be vulnerable to competing forces.
Why is CAR insurance facing headwinds?
While demand from policyholders for CAR insurance has stayed strong, the recent growth in supply from insurers has triggered reductions in policy premiums.
However, a variety of other market forces continue to impact the sector and may slow the pace of future price reductions.
Inflationary pressures within the supply chain continue to feed through to the cost base of underwriters and the cost of rectifying claims. Insurers must now factor the increasing lag time between the policy starting and the potential claim materialising – often years later – into their pricing.
The widely publicised steel and timber price increases post-COVID-19, along with continued labour cost pressures, are notable examples of added costs that continue to feed through to projects, during both construction and claims rectification.
Claims for CAR losses are evolving. Fire goes up and water goes down; but while fire risk continues to be seen as the most critical in construction, water has silently risen to become the new 'fire' for insurers – with 'escape of water from internal systems and services' now the number one cause of claims. As buildings grow in height, so the water 'fall' grows.
Furthermore, buildings house ever growing levels of technology and fibre optics – all easily damaged when wet, leading to escalating severity and complexity of losses. The issue has become so critical that a new Joint Code of Practice for escape of water has been introduced by the industry.
Rates of contractor insolvency also remain high. The complexities of insolvencies within a project supply chain create significant risks for insurers during any project and may even threaten coverage continuity, claims responses and recoveries.
Insurers are especially weary of security risks that can result from protracted cessation periods, and how any replacement contractor's works will dovetail with the existing project.
The inflationary pressures that result from significant delays and appointment of replacement suppliers add further challenges.
Modern methods of construction (MMC) offer many benefits in the construction sector; however, for insurers the use of MMC introduces potential for greater and more complex risk.
For example, damage to prefabricated modular units may be more expensive to repair in situ than the original off-site construction cost.
The wave of insolvency within modular manufacturing makes the ability to replace damaged items even more challenging for insurers.
Prototypical methods by definition lack historic performance data compared to traditional approaches and therefore carry greater potential risks for insurers.
The increased use of structural timber, such as cross laminated timber (CLT), in the industry has introduced greater variables for both water and fire damage.
It is understandable why many CAR insurers would balk at covering timber construction, given the danger posed by damage from water and subsequent mould, as well as the perception of increased fire risks.
Storms and flooding are well-known risks for any property – particularly property during construction when it may be structurally vulnerable or exposed to the elements for long periods.
Recent increases in weather and climate volatility introduce greater frequency and severity of risk and losses for CAR insurers. It will come as no surprise that as a result, natural catastrophe risk is under increasing focus by underwriters.
How can an insured party respond to challenges?
As the CAR insurance market evolves, insured parties should take action to ensure they maintain appropriate coverage and to capitalise on the latest price reductions.
Use a specialist construction broker who understands the industry and coverage differentials that can help you ensure the protection meets your requirements and access the very latest pricing.
Don't wait to review your insurances. Many policyholders only think about their insurances at renewal, by which time it may be too late. Monitor inflationary pressure and contract value at risk.
With an unavoidable lag between policy inception and a potential claim, original policy values may be inadequate, causing financial vulnerability.
It is recommended to regularly review your insured sums to avoid potential under-insurance. Know your policy terms and conditions.
Not all policies are the same, and many contain very restrictive conditions and exclusions.
It is critical to ensure you source the right coverage and review coverage efficacy, so that as your project and risks evolve, the CAR insurance remains fit for purpose. Take pro-active steps to mitigate and manage your risks.
Projects with well managed risks are more likely to benefit from the lowest premiums and widest coverage.
Jason Baston is head of construction at Miller insurance
Contact Jason: Email
Related competencies include: Insurance
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