London market to remain closed for construction SPPI cover

The London insurance market is unlikely to start offering single project professional indemnity (SPPI) cover for construction firms again anytime soon, and there needs to be a fundamental change in how risk is managed and transferred before it is enticed back, delegates heard at Commercial Risk’s Construction Risk Management Europe conference.

“I think the market is changing a little bit and appetite amongst insurers is increasing, but I am not sure how close we are to London opening up to SPPI anytime soon,” said Michael Attwell, large client professions and product leader – large AEC at Beazley.

“Insurers have been burnt quite recently on that and I think it is going to take a little while longer for us to open up to that product again,” he added at the London event, held in association with UK risk management association Airmic, IMIA, LEG and the IRM.

PII is typically purchased on an annual basis in order to protect against claims from third parties. But SPPI insurance was developed to ensure dedicated capacity or limits for a specific project during its entire lifecycle.

Multi-year SPPI grew in popularity in various places across the world as the size and complexity of construction projects increased, with a lot of risk placed in London, Dubai, Australian and Singapore insurance markets. But insurers pulled back from writing the business after heavy losses on projects underwritten in the Canadian and Australian markets.

SPPI can still be placed in some markets such as the Middle East and Asia, but the costs have risen and underwriting is much more stringent. The London market has pulled out altogether.

Attwell believes that there needs to be a fundamental change in approach to how risk is managed and transferred before London market insurers regain the confidence to return. He said there are real concerns over the nature and purpose of SPPI and why it is bought.

“I have heard so many people over the years say the reason why SPPI is being bought is there are bad contract terms that they wouldn’t sign up to without SPPI, or there is a technical issue with that particular project that the contractor or consultant isn’t keen to take on. We see in the US market in particular that things have not quite failed as you can get SPPI cover, but it will be very costly… it says to me the risk isn’t being managed properly,” said Attwell.

Risk manager at Bechtel Paul Aird said he would like to see the London market start offering SPPI again. But he believes that high claims in the subscription market is one reason why the cover has become a problem and isn’t cost effective.

“One of the reasons I think project specific PI is not cost effective is there is a huge amount of claims cost. So we need to look at how we make the claim process simpler so the costs don’t erode the limit. On a subscription policy, all insurers can appoint their own defence council and experts are paid by the hour to dig into a claim, which erodes the limits. For me, there has to be a better way to do this on a subscription policy,” he said.

Richard Moody, senior partner and global head of the construction professionals group at Clyde & Co, said there is always the risk of the “tail wagging the dog” in the London market as following insurers have their say. But in general, he believes the subscription market runs smoothly if the lead underwriter is bold and does its job.

Aon was the headline partner at our Construction Risk Management Europe conference. CCi a Rimkus company, Zurich, Allianz, QBE, Swiss Re Corporate Solutions, Hawkins, HDI, Scor, Wint Water Intelligence, Descartes and Fenchurch Law were also partners.