Zurich Insurance will pull back from writing select construction property risks, following a portfolio-wide performance review. Robert Kuchinski, the company’s global head of property and energy, told CRE that the move is in response to the some of the most challenging market conditions seen in his more than 30-year industry career.
Zurich plans to cut available insurance limits for underperforming risks identified in its review by as much as 50%.
After more than a decade of softening, the construction insurance market is showing some signs of correction, but large parts are still a long way from being profitable, explained Mr Kuchinski in an interview with CRE. Construction property insurance rates are about half the levels seen ten years ago, he said.
“Humans have a history of repeating themselves. The only other time in my 32 years in this business that I have seen conditions this challenging from an underwriting perspective was the 1990s. Some hard corrections took place after that market cycle, which we are trying to avoid here,” Mr Kuchinski told CRE. “Customers look for predictability and consistency in pricing, but when a market gets as tough as it is today it leads to angst for buyers, who do not like big swings in rates,” he said.
“We have carried out a full review of our construction book – a deep dive to look at what is driving losses and why,” said Mr Kuchinski. “We have analysed where we can make money, but parts of the market are so soft that we struggle to see how we can make money for certain risks. This is a voluntary decision to halve our capacity for those risks. We hate to do it, but it is necessary,” he said.
The 50% cut in capacity for select risks could equate to a 5% reduction in the top line of Zurich’s construction portfolio, said Mr Kuchinski. “These deals tend to pay higher premiums than other types of projects. So cutting back capacity in a substantial fashion is expected to have a meaningful impact on top line. But we believe that these measures could have a positive impact on bottom line,” he said.
“We feel obligated to be engaged for customers, which is why we are not pulling out completely. But we have to pull back. Even if the market hardened significantly in 2019, we would still not make a profit in a number of areas,” he added.
Zurich is to reduce capacity in areas that it sees as unprofitable or problematic, such as prototype technologies, risks with excessive delay in startup cover and some heavy civil engineering projects. Zurich will also “back away” from oil and gas pipeline construction projects and thermal solar plants.
Rates are not the only issue, according to Mr Kuchinski. Terms and conditions and changes in underlying risk have also made parts of the market difficult to insure. For example, defect cover has broadened while related exposure has increased.
Parts of the market are changing, but insurers still face challenging times, believes Mr Kuchinski. The withdrawal of capacity to date is not enough to turn the market and earnings are so thin there is no margin for large losses, let alone catastrophes, he said.
“To help ensure that Zurich remains a long-term viable partner for our customers and brokers, we have evaluated various options to improve our situation. Loss of significant additional capacity from the market would lead to a phase of drastic correction, which is not good for customers,” he said.
For example, Zurich has experienced a large increase in attritional losses from non-flood water damage claims. Such losses increased from 7% of non-cat claims in 1998 to well over 20% by 2017. However, a combination of higher deductibles, risk engineering and loss prevention has started to bring loss ratios down.
“We do not just look to increase prices but will work with clients to reduce losses,” said Mr Kuchinski.
“Our risk engineers identified the trend, with root causes such as poor workmanship, quality control and frozen pipes. Zurich then launched an initiative to educate our contractor customers, sharing risk insights and recommendations that help them mitigate these very avoidable losses. In the end, customers would much rather avoid losses than collect from their insurer,” he said.
A number of insurers have already reduced capacity for construction risk, although Zurich believes that it would be the first major international commercial player to take this degree of action. Lloyd’s’ performance review, for example, has led to about ten London market insurers withdrawing or pulling back from construction risks, while several large reinsurers have also expressed concern about the state of the market, explained Mr Kuchinski.
“In the end, this is all about customer focus,” said Mr Kuchinski. “I made a promise to our customers, brokers and our own colleagues when I arrived at Zurich nearly two years ago: Our property team will be an even more transparent and predictable partner for you. Burying our heads in the sand and pretending nothing is wrong is not customer focused, as it would lead to short-term knee-jerk reactions that are no good for anyone,” he said.