Construction Sector Growth is Good News but Insurance Concerns Remain
It’s time for many design and construction firms to reassess their insurance needs
For architects, their businesses’ profitability is closely tied to the health of the construction sector which is why many will be paying close attention to UK construction output figures. The good news, despite the economic headwinds of high inflation and sluggish growth in the UK economy, are figures from the Office for National Statistics showing that 2022 saw annual construction output increase by 5.6 percent in 2022 compared with 2021 . In 2023, quarter on quarter growth has also been encouraging with quarter two showing construction output up by 0.3 percent (£137 million) – representing a seventh quarter of consecutive rises .
Economic and Operational Pressures Remain Despite these encouraging output figures, construction firms are not out of the woods yet: the pressures bearing down on them are numerous, including:
• Supply-chain issues continue to make materials harder to source and more expensive • Inflation and the cost-of-living crisis are dampening demand • An ongoing skills shortage is making it harder to take on projects • The continuing push to “net zero” given the growing legislative demands for areas such as sustainability and carbon emissions
In addition, there are ongoing insurance strains, particularly given how the Grenfell Tower fire of 2017 has driven a complete overhaul of the way design and construction risks are considered and underwritten by insurers. The realisation that the cladding attached to the Grenfell Tower caused the fire to rage out of control has impacted the risk profile of high-rise towers up and down the country and that of the construction and architect firms who built them.
The Building Safety Act 2022, for example – designed to improve safety for both high risk buildings and throughout the construction sector – has increased the standard limitation period for liability claims made against firms involved in design and construction from six years, for a simple contract, and 12 years, for a contract under seal, to 30 years, creating further challenges for the construction sector and insurers alike.
Increasing Insurance Rates Insurers’ response to this sudden uncertainty was to increase rates (particularly for liability risks), reduce the types and level of cover offered and, in some cases, retreat entirely from the market, creating additional financial and operational pressures for the construction sector. Talking to more than 60 SME construction firms about their insurance issues , Aon found:
● 42% have seen premiums go up ● 24% have experienced insurers being stricter in their underwriting ● 21% have seen insurers stop offering cover ● 16% have had the insurance cover they can secure reduced
Of all these issues, the most concerning for more than a third of construction SMEs (37 percent) was the rising cost of premiums.
Firms Stop Buying Cover According to the Aon survey, cost pressures are so acute for construction SMEs that 13 percent of respondents stopped buying some types of insurance altogether. Public liability (31 percent) and professional indemnity cover (25 percent) were the types of insurance SMEs dropped most frequently by firms with reasons given as follows:
● 73% felt they weren’t necessary ● 55% said it was due to increasing premium costs ● 36% said they were cutting back to save on costs following the pandemic
Ceasing professional indemnity cover for any firm offering professional advice in the design and construction sector is risky and not recommended, with firms leaving themselves financially exposed. In many cases – for architects at least – professional indemnity is often required by their professional body whether that’s the Architects Registration Board through their Architects Code of Conduct and Practice, the Royal Institute of British Architects, or the Royal Incorporation of Architects in Scotland.
Architects will often also have professional indemnity cover stipulated by their contracts, or to be an ‘approved consultant’ under tender lists. And, in the event of a claim, having the support of a broker and insurers could also be invaluable and improve the likelihood of preventing significant financial impact.
Time to Reassess Your Insurance Needs Many firms have not had their insurance needs properly assessed in recent years with less than 44 percent, in the Aon survey having their requirements reviewed in the past two years. As architects, construction and other firms in the design and construction sector come to terms with the changing operational environment, they should consider securing professional support to reassess the insurance landscape. Stricter underwriting criteria, more invasive risk surveying and even increased rates are likely to become permanent features of the market, but with the support of a professional insurance broker, the fluctuations of the insurance market can be better managed.
1 - ONS - Construction output in Great Britain: December 2022 2 - ONS - Construction output in Great Britain: June 2023 3 - Research conducted amongst 62 Construction industry professionals with insurance decision making responsibility. Fieldwork conducted in June 2021.