Analysis reveals dramatic increase in construction firms closing

Are you covered

Huge increase in insurance premiums adds to growing pressure on construction firms

Analysis of industry data by Mactavish reveals that 44,430 UK construction firms closed in 2020.  This was 4.16% higher than in 2019, 18.42% higher than in 2018 and 21.54% more than in 2017.

There were only 37,485 construction firms that launched in 2020, 26.2% lower than in 2019 (50,785 new construction firms launched in 2019).

One of the reasons why more construction firms are closing is because insurance premiums are increasing dramatically, and a growing number are finding it difficult to pay these and may close as a result.  It says there has also been a considerable erosion in the quality and extent of the cover provided by insurers.

Bruce Hepburn, CEO, Mactavish said: “The COVID-19 crisis has had a devastating impact on the construction industry.  As the risks facing the sector increase and insurers are generally increasing premiums to improve their margins, many construction firms are finding it difficult to pay their premiums.  Some are having to cut back on the quality of their cover or on their operations, and for some it is the final nail in the coffin. However, there are ways you can reduce premiums and also improve the quality of cover, such as having two brokers pitch for your business along with their preferred insurance partners, as opposed to just using one broker, which is what most companies do today.”

According to recent reports, UK commercial insurance pricing has surged by over 40% across the board, with construction companies being particularly badly affected. Despite this, they say that on some of the tenders it has run on behalf of clients, premiums have fallen by over 30% against the estimates given by incumbent brokers.

 

What should insurance buyers do?

Firstly, construction firms should start from the ground-up. They should reflect on their insurance programmes and develop a robust understanding of the key scenarios they want to be covered and the relevant structures of project and parties involved.

All stakeholders must understand what coverage is contractually required for a project, and there should be a means through which they can communicate and collaborate on coverage developments and concerns; this is crucial where coverage changes might place a firm in breach of contract, or where additional disclosure obligations under the policy are likely to be required to maintain cover. Where there are rights of subrogation, firms should designate responsibility for overseeing the validity of the underlying policies that are placed.

Secondly, the other crucial area of focus in a hard market – of the type not seen for over 15 years – is how construction firms market their risk effectively. This involves improving insurers’ understanding of their exposures and differentiating it from those of their peers. Developing a bespoke risk prospectus is an effective way of ensuring that insurers will not view their risk as a commodity - or sell them an unsuitable generic policy - and puts firms in the best position to achieve improved, reliable coverage at a more competitive rate.

Hepburn added: “In a hard market, you shouldn’t see buying insurance as a procurement decision, Instead, you need to understand that you are seeking capital from insurers and approach your renewal on that basis.

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