Construction insurance premiums are on the rise post Grenfell, but contractors should be wary of insurers offering cut-price policies, says Clive O’Connell.
Clive O’Connell
In the aftermath of the Grenfell tragedy of June 2017, the owners of at least 130 privately owned towers tried to determine who should pay for making their buildings safe and whether that cost will ultimately be borne by insurers. The cost of that remedial work could exceed the cost of Grenfell itself by a significant multiple.
The insurer who provided cover to The Royal Borough of Kensington and Chelsea is Protector Forsikring, a Norwegian company. Protector is, in turn, heavily reinsured and the bulk of the claim, £47.5m out of a total of £50m, will ultimately be paid by the reinsurers led by Munich Re.
Such a loss to the reinsurance markets, coupled with the possibility of additional claims in respect of making safe other buildings, will impact heavily on the future cost of insurance. Insurers and their reinsurers make their money from charging more in premium than they pay in claims and so when a large claim is faced, they must recoup it.
A further external factor is also in play. 2017 was a disastrous year. Three of the five most expensive hurricanes of all-time hit the US coast. Hurricanes Harvey, Irma and Maria caused losses in the region of $265bn.
At times of rate increases, there is strong motivation to shop around for the best deal. But construction companies should be cautious. Cheaper deals in insurance often provide less cover or are provided by insurers who are not as expert in the field as others.
Risk of solvency failure
While Solvency II, the pan European regulatory standard, ought to minimise the risk of solvency failure among insurers, the failure of the Danish insurer Alpha earlier this year, shows that it is not infallible.
A second important exercise is to assess the insurer’s experience. An insurer seeking to enter a market like construction, where premium rates have recently increased, will often look to offer discounted rates to attract business. It is essential to bear in mind that one does not only buy insurance for the ability of the insurer to pay claims.
Part of the service that one buys from an insurer is their ability to navigate the complex area of disaster management. If you pay less, you will receive less service.
Another way in which prices can be reduced is by offering terms that provide less cover. Two insurance quotes do not necessarily provide identical cover. Deductibles can rise and may not be properly reflected in the premium discount. Additionally, exclusions or limitations on cover can reduce the price of insurance. There is a reason why insurers will reduce rates for cover and that is that they are assuming less risk and leaving that risk with the insured.
Insurance premiums will rise in the wake of Grenfell and in the light of global insurance conditions. Be very careful before seeking the cheapest cover available.
Clive O’Connell is a partner and head of insurance and reinsurance at law firm McCarthy Denning.
