Rupert Roberts offers an intermediary’s perspective on some of the current challenges facing the construction and engineering insurance industry and explains why there can be a sting in the tail.
There are a number of long-tail exposures involved in construction projects, from potential professional indemnity type exposures around design or construction of the structure, materials selection and/or workmanship issues on-site, to environmental impairment liability exposures arising out of the construction process itself. With respect to construction projects in Asia, however, short tail risks are often the key focus of clients.
It is important that insureds are cognisant of the exposure they have to both shorter-tail and longer-tail risks and are adequately protected. As insurance seeks to align with the contractual situation, the length of a construction period or defects liability period and the statute of limitations on design all play a role in determining the level and extent of exposure faced by a developer, engineer, architect and/or contractor.
How can underwriters and brokers factor in the potential for claims several years down the line?
A single word answer would be: ‘data’. The insurance industry has extensive data records on the loss histories of various types of construction projects and the contractors who carry them out. Dealing with long-tail exposures requires the industry to ensure that its various business units are talking to the construction teams, for some claims may not be realised until several years after the construction has been completed.
From a broker’s perspective, the first step in this process is to ensure that policy wordings across all policies are properly constructed, at the outset. This is true for both short and long tail risks. Long tail loss events can be extremely complex, and the claims process can at times be difficult to navigate for clients.
It is the role of the broker to support the client actively throughout the entire claim’s lifecycle, from pre-loss engagement through notification of the loss to final indemnity payment. The key focus is to ensure claims are settled as quickly and equitably as possible and that effective communication is maintained between all parties during the claims process.
Against the backdrop of a hardening insurance market, how can insureds better manage and mitigate their risks?
Risk management has always been the starting point of any discussion with our clients and the importance of effective risk management is only growing in the current market. Organisations who are able to differentiate their risk quality in the market will outperform their peers in terms of the rates they will see from the insurance market. For operational risks which have previously suffered losses, underwriters will also want to understand what corrective measures have been taken to improve future loss performance.
Insureds must work actively with their brokers to establish and improve existing enterprise risk management frameworks and ensure that these investments in improving their risk are clearly articulated to the market. Before approaching the market to transfer risk, organisations must focus on identifying potential loss events, understanding the potential likelihood and severity of these risks manifesting and then work with their broker and in-house risk team to create effective mitigation and monitoring systems. This is an ongoing process and must be embedded within the culture of the organisation.
What are the benefits in taking a sophisticated approach to risk as they look to secure coverage?
The key for insureds is to understand their total cost of risk and then make decisions around this key metric when approaching the market. Historically, there has been a push for lowest deductible and lowest premium. As the market dynamic continues to change, this approach is unlikely to yield the optimal result for organisations.
Insurance is one tool in a risk manager’s box and the associated premium is one contributor to their overall total cost of risk. As the premium associated with risk transfer increases, having visibility on the total cost of risk and making decisions on this basis around how much risk to retain and on strategic investments in risk management will become increasingly important.
We speak with clients about the concept of “risk management advantage” and we believe that increasingly, organisations who take a strategic approach to risk will outperform their peers in the volatile world we operate in today.
COVID-19 is a clear example of this. While most organisations did not specifically have a focus on a future pandemic event, those who had robust crisis management plans in place and a risk culture embedded within their organisation, outperformed their peers who did not, with respect to their response to the pandemic.
To many, “sophisticated” means expensive but too many ignore the expense versus cost equation that insurance can help resolve, ie if cheap, unsophisticated insurance does not respond to claims, what is its value and if the delta in premium of a sophisticated insurance programme is less than the first claim, hasn’t it proved its worth?
Tell me about the role of the broker, particularly in a challenging market?
Going forward, organisations will see different outcomes when dealing with transactional brokers vs strategic risk advisors. The changing market conditions require organisations to take a more nuanced and holistic view to their enterprise risk landscape. With respect to construction projects, we spend a significant amount of time supporting clients with risk allocation and each party’s responsibilities under key contracts and project documents, before construction commences, then ensuring that insurance dovetails with these arrangements.
In the current environment, organisations need to see more options from their brokers and understand the various tools available to them that can be used to optimise their total cost of risk. Across industries and product lines, we are seeing more and more organisations look to alternative risk transfer solutions, captive or protected cell vehicles and structured insurance solutions, in balancing their overall approach to risk financing.
The ability to work with a strategic advisor becomes increasingly valuable as we consider emerging and tail risk events such as COVID-19, cyber risk and climate change. These are complex and, in some cases, systemic risks which require a sophisticated approach to overall management and risk financing.