Feeling the brunt

Bruce Hepburn

UK SMEs in the construction and engineering sector are going to feel the brunt this year of wider developments in the insurance industry, that means the conditions applied in their policies are going to deteriorate drastically. These new conditions will be so adverse that many SMEs will even find their abilities to conduct business threatened. Bruce Hepburn, Chief Executive Officer, Mactavish discusses the implications

The policy condition changes will hurt the construction/engineering sector generally, and impacts have already been seen with 50-100% price hikes on professional indemnity (PI) and Director & Officer (D&O) policies, as well as significantly reduced cover for businesses of all sizes.

But mid-sized construction/engineering SMEs that are big enough to get involved in complex ‘interesting’ projects will face the biggest problems because insurers perceive them to be higher risk firms that are over-reaching themselves without the adequate risk controls that characterise larger firms. Such firms include, for example, those involved with facades/cladding, building stadia and other civil engineering projects.

Insurers also fear that such SMEs are exposing themselves to disproportionate risks by being the smaller partners negotiating with larger counterparties.

The more adverse conditions have come about because insurance companies are tightening their policy conditions and raising prices in certain industry sectors that, after enjoying a long period of attractive insurance pricing, have now become so complex that insurers are reluctant to underwrite the risks.

The issue has emerged now after years of poor insurance underwriting results and sustained losses that came to a head towards the end of 2018, prompting several underwriters to withdraw from writing professional indemnity risk in the construction sector altogether and leading to a tightening of insurance market conditions which is unprecedented in the last 15 years.

Because insurers are now providing sharply reduced cover levels to construction SMEs, irrespective of cost, this could disqualify these companies from accepting new contracts or drive them into non-compliance with existing contracts. In the most extreme cases, this could threaten huge contraction of companies’ operations or even prompt distressed business sales, with drastic consequences for shareholders and management.

The net effect on insurance value for money for SME construction businesses will be catastrophic.

Mactavish’s own view is that insurers’ perceptions are often erroneous – smaller, specialist contractors may nonetheless focus on core areas of expertise and have tightly-controlled management with less scope for contractual variance or anomalies.

But SMEs must work to change insurers’ perceptions. They must devote more resources to communicating and differentiating their risk quality and second, identifying and resisting restrictions in coverage. They must explain clearly that they are getting involved in complex projects but also stress their risk controls and that they are well-run organisations.

It may be that SMEs will need to take advice on negotiating with insurers to maintain quality cover at fair prices. Otherwise they could find themselves being railroaded into adverse policies with punitive terms that will prevent claims being paid out.

But there is also a lesson in what is happening for SMEs beyond the construction industry. Although construction is among the first sectors to be hit, worsening insurance conditions are already spreading to other industries too. And the same vulnerabilities affecting construction SMEs will apply to their peers in other sectors.