Katie Puckett reports on how brokers and insurers are rushing to capture a slice of the thriving construction industry. But will the credit crunch cause the sector to collapse?
Unless you’ve been staring at your feet for the past three years, you can’t fail to have noticed the construction boom gripping Britain.
The skyline of London and many provincial cities has been a forest of tower cranes, with new skyscrapers – by London’s standards at least – appearing seemingly every week. Less obvious, but no less frenzied has been the response from the insurance community. There’s a noticeable rush from brokers to capture a slice of this potentially lucrative market for themselves, and insurers seem to be following them.
In the past year, there has been a flurry of senior executive moves around the construction insurance sector, in the UK and abroad. Last month, Hyperion set up in Dubai, promising to aggressively pursue construction work; at the other end of the scale Giles bought Kent-based broker Shepherds to get access to its expertise in construction. In March, Oxygen Insurance Brokers poached five of Giles’ staff to establish a new office in Manchester to focus on construction and post-construction risks.
Jim Fuller, Oxygen’s construction power and mining leader, who joined the broker in 2005 from the construction division at Marsh, highlights the strength of the market. “The construction industry is booming and the insurance sector has seen substantial team movement and new capacity providers entering the market. There’s work for everyone at the moment.”
John Forder, chairman and chief executive of construction risks at Willis, has also noticed the expansion. “It’s a very strong market for UK construction. It has grown dramatically over the past two years. All of a sudden there has been an explosion in the market.
“The number of insurers active in construction in the UK has probably doubled from 10 to 20 overall. There are also more construction specialist offices around the world, and regional offices have opened up or been reactivated too – in the UK, and in the Middle East and Asia.”
The question is how long these new entrants will remain in the market, with the credit crunch stalling developments across Europe and the US?
It’s not hard to spot the appeal of the construction industry. UK construction has enjoyed more than a decade of growth, and is now worth £82.4bn. It’s been firing on all cylinders in recent years, with residential and commercial development booming across all regions, a mammoth public sector building programme for schools, hospitals and social housing, as well as big ticket projects like Heathrow Terminal Five consuming vast amounts of men and materials in the South.
Until the credit crunch got everyone worried, the main topic of conversation was where on earth contractors and consultancy firms were going to find enough people to fulfil all the projects that clients from all sides were throwing their way.
Even now, with commercial development stalled and residential developers in retreat, contractors have plenty to keep them busy until mid 2009, and there’s much public sector work beyond that with the lion’s share of the government’s £45bn school building programme proceeding slowly but steadily, a new £2.3bn prison programme, £16bn earmarked for the Crossrail infrastructure project and of course, the Olympics, at £9.3bn and rising.
And for insurers, construction is very much a global market. The extraordinary boom across the Middle East and in emerging markets such as China, India and Russia shows no signs of faltering.
“There is a considerable amount of construction activity across the world,” says Oxygen’s Fuller. “Five years ago, a £1bn project was big, now the mega projects are usually over £5bn. There are many areas in which either the petrol dollar is funding projects, or the mineral dollar is driving projects.
He adds: “With high oil prices, money flowing into the Middle East is funding iconic, statement or infrastructure projects. In Saudi Arabia, the government has commissioned 14 major power and water stations at an estimated cost of $15bn-$20bn (£7.6bn-£10bn). The mining industry can’t get it out of the ground quick enough. Serious emerging buyers for raw materials are pushing up prices and, to meet the demand, suppliers need to build extracting, refining and processing capacity.”
“Itâ€™s a very strong market for UK construction. It has grown dramatically over the past two years. All of a sudden thereâ€™s been an explosion in the market.
John Forder, Willi
A smelter planned for the United Arab Emirates will have a £5bn project value on one site, he says, adding: “Where projects are funded by project finance deals, financiers continue to insist on quality international insurance products and standards.”
Construction is a safer bet than it used to be because of the efforts contractors have made to better manage the high risks associated with their trade. Contractors insure themselves against damage to site in progress; public liability; employers’ liability; and for consultants or contractors engaged in design-and-build contracts, professional indemnity.
Despite the Health and Safety Executive (HSE) campaign to cut the number of accidents in the sector, building remains a dangerous business. Earlier this month, the HSE announced there had been 69 site deaths in 2007/08, a 10% fall on the previous year, but it stopped work on a third of the 1,000 sites it spot-checked.
Laurence Gilmore, construction director at Aon, says: “The problem with construction over the years is trying to identify those that manage their risks properly and have robust systems. Those that pay lip service are usually the ones that make claims.”
Gilmore says that policies developed to prevent site disasters, such as fire and tunnel collapse, regulations on handling toxic materials like asbestos and the introduction of in-house health and safety management teams, have to a certain extent cut the risks that traditionally put underwriters off.
“The industry got a bad reputation for disease claims on things like heavy leg, vibration white finger and asbestosis. The problems have gone away but the past is catching up with it,” he says.
Since the Corporate Manslaughter and Corporate Homicide Act came into force last month, directors presiding over companies that kill their workers can also face a police ‘
‘ investigation – a very strong incentive to get their houses in order.
For insurers and brokers new to the market, it’s not always easy to spot a good bet, so senior staff with experience of the market are much sought after in the current gold rush.
Gilmore himself worked in construction for more than 20 years, for contractor Amec, now a professional services firm, and says his background does help him to talk to clients and translate it into a positive message for insurers.
“It’s one thing to talk to a retailer about people walking through a store,” he says, “It’s totally different talking to a contractor about people walking through a site.”
The public-private partnerships that now provide such a large proportion of the industry’s work are also much more complex than traditional contracting arrangements, warns Bernadette Hackett, a partner in business development in the construction division of broker Jardine Lloyd Thompson, a long-time player in the market.
“You have to delve into it in a lot more detail. A lot of big projects are governed by the Official Journal of the European Union (OJEU) rules which are incredibly onerous. Our role in the past was buying insurance, but now there’s a lot of extra advisory work that goes on. Contractors might be taking on unnecessary risk in the contract or agreeing to buy cover they won’t be able to get,” Hackett says.
“If you can come up with a new product that would be of benefit to the construction industry you could make a name for yourself.
Laurence Gilmore, Aon
This explosion in new entrants has been great news for construction firms, but bad for brokers and insurers who must drop their premiums to remain competitive. “There’s more than enough capacity to meet demand in the UK, which all helps to drive down rates. Premiums have reduced 20%-25% over the last 18 months,” says Forder at Willis.
Hackett has heard of annual classes dropping by 30%-40%.
Construction insurance is now a buyer’s market and as developers struggle to find finance and fewer deals are done, it will only get softer.
According to the Construction Products Association, which publishes quarterly figures on the state of the market, contractors received only £325m of new orders in February, half of the level of new work taken last November and a third of that of last May. Forder and his team have seen several projects shelved that were dependent on European or US finance.
London is no longer necessarily the hub for construction projects, with many firms opening Middle or Far Eastern bases, often using Lloyd’s as a lever. “Major projects in Asia often used to come to London, but a lot can be insured locally now – there are really good professional markets with big capacity,” says JLT’s Hackett.
Forder believes brokers will have to spread their placements just to stay competitive. “We”ve just completed a project in Greece, with placement in Greece, Holland, Spain, Germany, Bermuda, London, Paris – seven or eight different markets. Any broker that is not able to do that, or wholesalers relying on other brokers to give them business, are not in a strong position. We just placed a major UK project at a price 40% lower than our competitors by placing with European markets.”
Construction brokers are also fighting to come up with new products. But there aren’t many glaring holes in this established market, and persuading underwriters to take on those liabilities will be a challenge.
“If you can come up with a new product that would be of benefit to the construction industry you could make a name for yourself,” says Gilmore at Aon. “The biggest gap I’m aware of is losses through delays that contractors can’t recover from their own clients, usually labour costs or overheads like site accommodation. Everything else can be put through the main insurers.”
Biba technical services manager Steve Foulsham thinks that contractors requiring basic liability insurance are well catered for through major insurers. “Brokers need to give more thought to the demands of the more complex construction companies that, for example, do larger design-and-build work, where they take a project from the planning stages and do the whole bespoke job.”
To stay in the market, a lot of insurers will have to take a broader view of projects they might have dismissed in the past. Big civil engineering projects such as tunnelling or those that are partly offshore were always considered higher risk, but premiums can now be five times higher.
Construction though is a high stakes game and when things go wrong, they can go really wrong. Firms rushing into the market now would do well to remember the disasters of the early 1990s when insurers paid out more than £150m on the collapse of tunnelling work for the Heathrow Express and fires at two sites near completion in the City, at Broadgate and Minster Court.
“The UK domestic market suffered a series of very large claims and total losses exceeded the market premium income many times over,” remembers Forder at Willis. “The market hardened dramatically and only in the past year or so have we seen a return to a more extensive and competitive marketplace. Those past losses are now largely forgotten after years of profitability for insurers.”
Even though the industry has improved, many of the largest overseas projects are using technologies that have never been tested. The tallest tower under construction in Dubai for example is expected to be nearly 700m high, and there are many rivals ready to spring from the drawing board. Marine reclamation projects such as The World or The Palm Islands in Dubai have never been attempted on such a scale. “Construction insurance is high risk,” says Hackett. “Things do go wrong. Even with the best risk management, there are still humans involved – and there’s no accounting for really bad luck.”