Author: MECON INSURANCE PTY LTD
Why Construction Rates Will Continue to Rise
Insurance News, 23 July, reported that IAG posted a very significant loss ($427m) for the 2020 financial year. This was attributable to the increased cost of liability claims, particularly for bodily injury, where there had been an increase in average claim size.
In Insurance News, on 28th July, Willis Towers Watson reported that there will be no easing of construction rates, and Public Liability rates have already increased upwards of 60%.
Finity’s actuarial assessments of ultimate loss ratio for the Australian construction Public Liability market, using the National Claims and Policy Database, shows that construction has consistently been the worst performing Public Liability market in Australia for a number of years.
We recently saw VERO withdraw its support for construction insurance in Australia and several Lloyds markets have also withdrawn their capacity for the Australian construction market.
The future of Public Liability for construction in Australia is unstable and uncertain and remains an ongoing challenge for insurers.
Causes of Increasing Insurance Premiums:
- The most influential factor increasing rates in the construction Public Liability space is the incidence and cost of Worker-to-Worker (W2W) bodily injury claims. These combine with Court awarded damages, Worker’s Compensation Insurance (WCI) payment recoveries and the associated legal costs of litigation. These combined costs of W2W claims are compromising Public Liability covers. This is not only occurring in the construction sector, but also in other businesses and organisations who require Public Liability insurance to cover the risk of bodily injury. This is resulting in financial, social and loss of amenities issues for Australia.
- ICare’s premium calculator shows that WCI premium in NSW is charged at 4%, 6.5% and 11%, plus or minus, on annual wages (plus superannuation) for builders, carpenters, and concreters respectively. Public Liability premium is charged, on average, at less than 0.30% on the total annual revenue/turnover of these same contractors. In comparison, WCI premiums are some 300% – 800% higher than Public Liability premiums for these construction trades – and Public Liability premiums are heavily influenced by the WCI cost-recovery component of W2W claims. (Similar disparity between WCI and Public Liability premiums exists across other states). This gives pause for thought (if not concern) as to how much higher Public Liability insurance rates will need to be to keep pace with just the rising cost of WCI recoveries, when you consider that worker’s compensation premium rates are specifically calculated to cater for bodily injury risk alone – without the burden of legal expenses or Court awarded damages!
- W2W claim action is often initiated many years after the event, making it very difficult for Public Liability insurers to predict the cost of future claims and to defend them when they materialise. The compounding effect of Court awarded damages, WCI recovery costs and legal costs, only increase this difficulty. (As reflected in IAG’s experience).
- WCI premiums will often increase in response to claims incurred. Similarly, construction Public Liability insurers will invariably increase premiums in response to W2W claims. These two increasing insurance costs impact the construction industry and ultimately increase the cost burden of building to consumers.
- There are circa 360,000 registered builders in Australia who require Public Liability insurance for risk protection. With the $multi-million damage judgements being awarded by the Courts and the rising average cost of W2W claims, the pressure on Public Liability premiums for the construction industry across the whole of Australia is, as Willis Towers Watson reports, unlikely to ease. In a nutshell, the construction Public Liability premium burden to meet the high (and increasing) W2W claims is being borne by a comparatively low number of builders across Australia. Of real concern, similar factors of claim-cost versus the comparatively low number of premium-contributors exists in the Professional Indemnity (PI) market – which has been under tremendous strain.
The pressure on insurers, created by the current bodily injury adjudication system, has seen many insurers (servicing Australian construction organisations – both locally and offshore) withdraw support for construction insurance. (This previously happened with Home Builders Warranty Insurance).
- The cost of Public Liability insurance (vital to manage risk in most businesses) has become prohibitive for some SME’s. This is likely to continue. The impact is being felt beyond construction – with closures of parks, reserves, sporting and recreational amenities and community organisations across Australia. The admission costs, for those that remain open, are becoming prohibitive because of the cost of Public Liability insurance – or rather the impact of bodily injury costs on Public Liability insurance!
Risk Management. The Alternative View:
Some may say that injuries on construction sites are the proximate cause of the increasing Public Liability costs. Risk management and avoidance of construction site injuries is therefore the answer. Whilst true to some extent, such a theoretical view needs to be tempered by the reality of the situation.
Nobody on a construction site wants their employees or contractors to sustain injuries – or worse. However, “accidents” will continue to occur on construction sites, in the same way as car accidents will continue to occur on our roads.
Both roads and construction sites are inherently dangerous places, and reliance on human behaviour to manage risk and prevent accidents, in either place, will never produce a perfect result – as our daily news all too often attests.
Thus, the alternative view has practical flaws.
The Solution:
In response to a noticeable “crisis” in Public Liability insurance in 2003, the Tort Reform was introduced. It aimed to reduce the number of bodily injury claims litigated and reduce the size of Court awarded payments to injured claimants. The Reform proved to be unsuccessful in its aims. However, it is very relevant that the issues we see today have long been recognised, and the crisis persists.
Bodily injuries sustained in car accidents are subject to capped damages via the Motor Accidents Compensation Act, enacted in 2017. This Act sought to avoid volume litigation pressure on the Courts, contain Court damage awards, and it enables the cost of motor vehicle third party (CTP) insurance to be maintained at reasonably affordable rates for the majority. It is very difficult to understand why accidents which occur at worksites are not capped for similar reasons – particularly given the community and social issues being prevalently caused by increasing Public Liability costs.
It is relevant that the Tort Reform and the Motor Accidents Compensation Act sought to address the same things, but only one succeeded.
W2W litigation sometimes isn’t settled for 10 or 12 years from the date of the event, hence the term “long-tail” liability. This tail is reflected in actuarial analyses used to price the risk. Thus, the long-tail claims must be paid tomorrow out of the Public Liability premiums collected today, to ensure the profitability of the insurers carrying the W2W claim exposure risk into the future. This reactive pricing, together with increased self-insurance levels (“excesses/deductibles”), is regrettably the ongoing solution to the crisis.
Without change, perhaps along the lines of the Motor Accidents Compensation Act, the issues recognised long ago in the Tort Reform, and still evident in the current state of the market, will not diminish. They will continue to impact the affordability of Public Liability insurance and compromise the viability of this cover for the businesses that need it most.
It is very concerning for construction Public Liability, and for Australian society in general, that there is currently no solution in sight for this crisis.
