Risk management and captives key for construction buyers seeking SPPI cover

Risk management and captives are increasingly crucial for construction firms wanting to access the extremely tough single-project professional indemnity (SPPI) market on anything like reasonable terms, according to a leading broker and insurer.

Panellists at Commercial Risk’s Construction Risk Management Conference 2022 explained that rates for SPPI are “quite extraordinary” and there is “significantly” less capacity available to buyers.

Where once each insurer would accept up to $15bn-$25bn for the risk, this has now reduced to $5m, the experts explained. And the number of market players is dwindling. This makes it difficult to build meaningful towers and secure the capacity needed.

And in this market where buyers are struggling to find much cover at anything approaching a reasonable price, Juliette Pettit, underwriting manager of PI and cyber at AIG, said risk management is absolutely vital for those seeking protection.

“We really place a lot of emphasis on the risk management. If you have got stellar risk management, we will be happy and open to discussions and be more flexible on terms and conditions, pricing and deductibles… It will certainly entice us to look at the risk more favourably,” she said.

In particular, SPPI insurers want to know that risk managers across the various parties involved in a project are working together and regular risk management reviews are carried out, added Pettit at the event sponsored by Aon as headline partner, plus Swiss Re Corporate Solutions, QBE, Zurich Insurance, Sedgwick, Scor and Jupiter Intelligence.

“The risk management relationship with other parties is vital – what is your relationship like with the owner and are you having open, frank discussions with them? Are you having these discussions with other parties downstream and are they managing their risk? Is risk managed centrally or is everyone working in silos? These are key issues,” she said.

“We would also like to see regular risk management reviews carried out, that change orders are shared and everyone knows about them. So, it is about the relationship with the owner and those that pass within the contracts. That needs to be open and we want to see that risk management is shared across all of those insured parties,” said Pettit.

Fellow panellist Mark Peterson, SVP and executive director in Aon’s professional services group, said clients are turning to captives in a bid to get the most out of the SPPI market, taking on more risk themselves and leaving the limited capacity available for more catastrophic losses.

“We are looking a lot more, especially on the annual programmes, at much larger retentions. So, captives are probably the hottest topic and how do you deal with the risk internally? We have seen that grow and grow for two or three years on annual programmes, and we are even seeing that now on projects where companies are self-insuring under captives. I think that will continue, if nothing else to maintain what capacity does exist from insurers,” said the broker.

And responding to a question from the conference floor, Peterson said he doesn’t see the use of captives as market failure and believes their role in funding ever-increasing retentions are in part a natural reaction to bigger construction projects.

“One factor is the size of these projects has risen greatly. To see a billion-dollar project come across our desk six or seven years ago was kind of an event – now we see one every week, maybe more. And there will be even more. If something small happens, you very quickly burn through what was once upon a time reasonable retention,” he said.

The construction event was held in association with Airmic, the IRM, IMIA, IRMI and LEG.

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