Annual Insurance Review 2022: Construction All Risks

Published on 10 January 2022

In this chapter of our Annual Insurance Review 2022, we look at the main developments in 2021 and expected issues in 2022 for construction all risks.

Key developments in 2021

The construction industry has seen increased uncertainty, higher material costs and project delays due to the continuing COVID-19 pandemic . While many projects have continued (although often subject to various extensions), shutdowns, labour supply shortages (including due to difficulties moving labour across borders), delays in obtaining materials, staggered shift schedules, and social distancing requirements have all fed through to increased costs and often project scheduling delays.

Upwards rate pressures during the continuing hard market conditions have been reinforced in the construction all risks (CAR) market by poor loss experience in recent years and, as a consequence, numerous carriers scaling back their appetite (or withdrawing altogether).

The hardening market and recent poor loss experience have also prompted increased underwriting discipline, with many insurers insisting on stricter terms of cover and higher deductibles. Capacity has been utilized more selectively, with insurers preferring to vary rates according to the nature of the specific project and on clients with more favorable loss history.

Delays to project schedules have also resulted in an increase in requests for extensions of cover for on-going projects. Such extensions have often not been automatically granted and, where they have been granted, have typically been subject to stricter terms. The withdrawal of capacity from the CAR market in recent years has also led to some difficulties in obtaining reinstatement capacity for extensions on long running projects (and, where reinstatement capacity has been available, this has come with higher pricing).

In relative terms fewer disputes have emerged under delay in start-up (DSU) policies as a consequence of government mandated COVID-19 shutdowns, as compared with operational business interruption cover.

Standard DSU policies are triggered by physical damage and typically do not incorporate the type of non-damage notifiable disease extensions found in operational policies, so are much less likely to respond to such delays. The widespread adoption of "for the avoidance of doubt" COVID-19 / communicable disease exclusions in policies incepting or extended from mid-2019 onwards has ended most debate on this issue.

However, the UK Supreme Court's ruling in The Financial Conduct Authority v Arch Insurance (UK) Ltd [2021] UKSC 1, and in particular its findings in respect of the 'but for' causation test (when determining that Orient Express Hotels v Generali [2010] EWHC 1186 was wrongly decided), may have significant long term potential ramifications for DSU claims unless insurers act to revise standard wordings in the current hard market.

What to look out for in 2022

As we enter 2022, there is significant global economic uncertainty and supply chain issues. Labour shortages and increasing inflation (as well as anticipated further interest rate increases to combat this) will see construction costs increase. This will be compounded by continuing social distancing regulations and recurrent lockdowns in some jurisdictions as COVID-19 persists, leading to further delays, lower productivity and increased costs.

Supply chain issues, manifesting in numerous sectors globally, are likely to have a knock on effect on project schedules due to delays in getting physical materials to many sites. Likewise, labour shortages, including due to delays in skilled workers crossing international borders due to continuing quarantine requirements, will amplify this.

Extensions to project schedules will increase associated risk (and higher material and labour costs will feed into claims inflation) and it can be expected that 2022 will see further rate increases as well as continued focus on coverage terms.

Furthermore, concerns over potential defaults by Evergrande, China's second largest property developer, and potential ripple effects (other developers are also weighed down with debt) could have significant repercussions for the property and construction markets as well as the global economy. This may prompt insurers to pay closer attention to inevitable uncertainty arising out of potential insolvency problems in the construction sector.

However, more positively, the fact that global construction output is anticipated to grow significantly over the next few years (with much of the forecast growth in Asia Pacific) in parallel with increasing rates may tempt insurers to increase capacity in (and in certain cases re-enter) the CAR market.

New technologies will also continue to be increasingly adopted both during construction (including smart project management and construction equipment telematics to monitor the performance of machinery and equipment) and at the claims stage (with increasing utilisation of solutions such as drone technology).

With a longer term view, ESG will drive risk behaviour including a growing focus on green-infrastructure and green-financing. Furthermore, the need to factor in risks arising out of unpredictable extreme weather events brought about by climate change will increasingly impact design considerations but also lead to new opportunities.