In this long read, Griffiths & Armour group chief executive Carl Evans outlines some basic steps that government and the construction sector could consider to regain the confidence of the insurance industry and how all parties could grasp the opportunity to be at the heart of positive change.
In the face of unprecedented challenges throughout 2020 and 2021, construction professionals have shown exceptional resilience and fortitude. It is remarkable that so many firms have continued to perform at such a high level and particularly so when we consider the environment in which they are working and the risks they are required to take on.
From a professional indemnity (PI) insurance perspective, 2021 was an extraordinary year - one where issues concerning the availability, cost and specification of cover played out across the national and industry media. Consequently, PI was the subject of discussion at the highest levels of government. That is not a feature of a ‘normal’ insurance market cycle, nor is it something any of us have encountered previously - it points to an underlying and fundamental problem in the landscape that construction consultants are currently required to operate within.
The problems facing individual firms when securing and renewing their PI cover are often framed as an ‘insurance market crisis’. That focus looks at the problem rather than the cause. A lens on the insurance market can leave us looking for an insurance solution to what is actually a liability problem.
If insurers are walking away from a particular sector or severely restricting the cover they are prepared to provide, then we surely need to ask why?
When it comes to construction PI insurance, the answer is clear and is founded in the systemic issues that we - and other informed commentators - have been talking about for a very long time. What we are seeing now is a reaction to a continual ‘race to the bottom’ that has characterised significant parts of the construction industry for 20 years or more. That characteristic has resulted in unimaginable human suffering and as yet unrealised financial cost.
The Hackitt Report is the most recent in a series of reports which took a good long look at the construction industry, particularly high-rise buildings. Dame Judith concluded that the construction of those buildings was suffering from a “system failure” and highlighted that the sector has sought to prioritise quick and cheap, rather than safe and good. That view is reaffirmed by a series of evidence from the Grenfell inquiry, with testimony alleging that supposedly reputable and well-established firms pressure their staff to “lie for commercial gain”, where product guides were “deliberately misleading and dishonest”.
The picture painted is not one of individual incompetence or moral judgement. As Hackitt said three years ago, it suggests systemic failure. A system which ignores problems with quality and encourages bad procurement practices; a system which is ultimately incapable of delivering equitable risk and reward through the supply chain and which fundamentally places too little value on the services and skills that professional consultants can deliver.
It all points to a toxic risk environment. It leaves insurers struggling to trust their existing perceptions and understandings of the exposures they are being presented with and asked to underwrite. That surely signals a need for real change and what this means in reality is a complete change in culture.
That is because it is the environment that needs to change and it is with that aim that we at Griffiths & Armour continue to work with government, regulators, ACE and other stakeholders across the insurance and construction sectors.
We believe that the improvement of the legal, commercial and operational conditions for those designing and constructing the built environment are the only practical and sustainable long-term solutions to the ‘insurance crisis’. The whole mentality around construction procurement needs to change and the ‘race to the bottom’ must stop.
It cannot be about forcing liability onto people who are least able to control the risk and most vulnerable to taking it on board or forcing cheaper solutions through the euphemistically termed ‘value engineering’; allowing those creating the risks to benefit disproportionately and expecting consultants (and their insurers) to pick-up the pieces when things go wrong.
This sounds like a very grim assessment of where we are and it is a grim assessment but this is also a moment of real opportunity, a chance to re-set and break with the failed practices of the past. The last few years have uncovered some uncomfortable truths and frankly it would be shameful if lessons have not been learnt.
From our discussions, we believe there is a desire to get it right, but it requires real leadership. The government has a massive role to play in this and we should all seek their support to be at the heart of the cultural change that is required. With the contracts they impose and the fees they pay, government need to be applauded for advocating an equality of approach, but we all must question, does it really practice it?
What questions are there for consultants?
We are not blind to the commercial pressures faced by consultants, but we have long encouraged our clients of the need to better understand the risks they are taking on board.
- To be prepared;
- To say ‘no’;
- To expect fair payment for their services which takes account of the risks they are assuming; and
- To challenge the risk v reward imbalance that persists within the construction sector.
Today, the risks of not doing so are simply too great and will ultimately erode insurers’ confidence to the point where firms are viewed as uninsurable.
And what about the immediate challenge of rectifying dangerous buildings? The changes we are talking about, along with the opportunity the building safety bill brings, should serve as a platform for the future but they will not solve the immediate crisis for those affected by dangerous buildings and the inability of the general PI insurance market to cover ‘fire safety’ exposure to its full extent.
From our own research - and that separately done by CIC, CLC, RIBA and BIBA - of the available cover in the marketplace and the liabilities that consultants are being asked to assume, we are forced to conclude that the only option that will deliver the required clarity and financial support for those undertaking this urgent work is targeted government intervention. A government-backed insurance facility that removes disproportionate risk from consultants’ and contractors’ balance sheets.
So, what can we expect from the PI insurance market in 2022?
It may not be a popular message but in the context of the breadth of liabilities that consultants are routinely being asked to accept, the PI insurance market has been under-priced for decades. When we also view the scale of liabilities consultants are being forced to take on through increased limits of indemnity, we see how this only exacerbates that disparity.
For ten years we have been saying this will not carry on and there will be an adjustment. Every one of those ten-years that passed meant the required adjustment would be more severe - a compressed spring if you like. For many, this adjustment will have felt like a brutal price correction but we know from our own analysis that premium rates are only now approaching what might be considered a long-term average.
The challenge for us all is to regain the trust and confidence of insurers and to evidence that the risks we are presenting to the market are insurable and capable of being funded through those increased PI insurance premiums. But there is significant work to be done.
We have recently completed the renewal of our Scheme facilities (a framework to support the renewal of our clients’ individual PI insurance arrangements). Whilst that renewal is very positive news, the negotiations were some of the most difficult in a generation.
The challenges we faced are a reflection of market sentiment and point towards the issues consultants are likely to face in 2022, some of which are outlined below.
- Whilst the market may be through the worst of the premium increases, capacity constraints will remain a concern.
- Our expectation is that insurers will continue with a strategy to deploy capital in certain sections of the construction market where they believe they stand some chance of generating an underwriting profit. It is highly likely that some insurers will segmentally withdraw from covering certain professions.
- Fire safety is an area which will continue to fall under the insurers’ spotlight and further exclusions and erosions of cover are very likely. Careful consideration and structuring of PI arrangements will be required to ensure the right specification is secured.
- Whilst providing a moment of opportunity, the building safety bill features roles and responsibilities which (depending upon how they are ultimately defined) may not achieve insurer support. This will need to be closely monitored.
Consultants should understand that quality has never been so high on insurers’ agenda. The good should prosper but those who are unable to demonstrate how they are effectively managing their risk will continue to face significant challenges. For their part, insurers need to demonstrate an underwriting strategy that encourages quality and rewards good behaviours. It cannot be an entirely broad-brush approach that fails to give any recognition of the positive risk features of individual firms who are carefully navigating their way through an extremely challenging landscape.
But underlying everything is that need for cultural change. Insurers tell us there is a need to see a renewed focus on quality, on competence and lifecycle cost, a re-balancing of risk and reward and a fairer deal for all parties. It is, we believe, the only rational way to encourage sustainable insurer appetite and support informed competition within the insurance market.
If we can accept that challenge, it holds out the very real prospect of a built environment the sector can be proud of.
Griffiths & Armour is a leading independent and privately owned UK insurance broker and risk management adviser. For further information visit www.griffithsandarmour.com Griffiths & Armour is authorised and regulated by the Financial Conduct Authority.