Poor insurance underwriting results and sustained losses last year has forced several underwriters to withdraw from writing professional indemnity risk in the construction sector 

Construction and engineering firms in the UK could face “severely adverse” changes to their insurance policies due to “capacity blackspots”.

These have become so complex that insurers are reluctant to underwrite risk and could threaten the ability of these firms to do business, it is claimed.

The warning came from insurance placement and disputes firm – Mactavish. It cited the example of professional indemnity risks in construction and engineering shooting up in recent years as projects become bigger and technically more advanced with the involvement of stakeholders and demanding contracts.

It follows poor insurance underwriting results and sustained losses coming to a head at the end of 2018 forcing several underwriters to withdraw from writing professional indemnity risk in the construction sector. This has also led to a tightening of insurance market conditions in the last 15 years.

What does this mean?

Mactavish warns that the changes include sharply reduced cover levels irrespective of cost that could stop companies accepting new contracts or drive them into non-compliance with existing ones.

But in the more extreme cases it could threaten major contraction of companies or even prompt distressed business sales, with drastic consequence for shareholders and management. Other threats include premium increases of up to five times and excesses or deductibles going up by a factor of three to four.

Two further risks

Bruce Hepburn, chief executive at Mactavish, added: “There are two major further risks. One, the reliability risk is drastically increased because insurers will always challenge far more claims in a hard market, which is likely to increase even further beyond the 45% of large and complex claims currently disputed in the UK.

“Second, limitations will also lead to exposure to wild, punitive shifts in pricing and available limits, particularly pronounced in blackspot sectors and for companies whose risk information is poor, irrespective of how well the business is actually managed.”

He said that the net effect on insurance value for money for construction businesses will be “catastrophic”.

“To avoid the risks created by these changes, it is more imperative than ever that they think about how to communicate their risk favourably, to meet all their legal obligations and to clarify the terms of their insurance cover before it is too late,” Hepburn concluded.