Appetite for construction

Generating £80bn annually, construction is one of the UK's boom industries. But, with contracts becoming more complex and demanding, quality and safety is being compromised.Lower margins mean contractors are pushed to the limit, forcing them to compromise on quality and safety.

A recent documentary shown on Channel Five about the construction of the Petrona Twin Towers in Kuala Lumpur, Malaysia, where a film crew captured the race between erecting the towers, underlines the huge risks and technical ability in construction. At one point, lightning caused intermittent power cuts at the precise moment a connecting bridge between the towers was being set in place. The crew could not reverse the lift and the success of the operation hung in the balance. After a series of storms and power cuts, the bridge was finally fixed in place. The project managers heaved a huge sigh of relief and, presumably, so did the insurers.

Construction is big business. With so many components in the process, insurance is vital but also costly. Given complications arising from the range of parties involved in construction, brokers have the opportunity to capitalise by offering expertise and bringing together all concerned.

According to the Health & Safety Executive, construction is the UK's largest industry, employing 2.2 million of the nation's workforce. Carl Gebhard, head of construction UK and engineering at Zurich Commercial, says: "(The industry) needs to recruit 50,000 new employees each year just to stand still."

The sheer number of construction associations further indicates the industry's diversity and size. For example, the Chartered Institute of Building Services Engineers, the Construction Industry Council and the Institution of Civil Engineers, to name but a few.

Construction encompasses everything from building local hospitals to installing additional power lines in time for the 2012 Olympic Games, and is naturally an important revenue stream for brokers, insurers and reinsurers alike.

Main players

As would be expected, there are some big broker names in construction such as Marsh and Willis, and some specialist brokers such as Kerry London. However, given the long-tail liability in construction, there are not many insurers committed to the long term, according to Peter Wilson, construction account manager and developer for Giles Insurance Brokers in Glasgow. This leads to a more volatile market cycle. In January 2003, Professional Broking's sister title, Post Magazine, reported an exchange in parliament about rapidly increased rates for less cover, which was undermining the ability of smaller companies to bid for projects.

Wilson also considers 2006 will see the soft market bottoming out, with lower rates and more flexible underwriting, however, he warns in 2007 construction will become a more difficult market.

Leading insurers include Royal & SunAlliance, Norwich Union, ACE, Zurich and Allianz Cornhill. Lloyd's underwriters are also a key market for many international risks in the sector.

Gebhard says: "Construction is around 15% of Zurich's total business in the UK. We deal with around 50 national and regional brokers, including Heath Lambert, Giles and Kerry London. We have 65 underwriters dedicated to the industry based in London, Birmingham, Leeds and Glasgow." He adds: "Construction companies are quite specialised; expertise is crucial."

When considering the size of the market, Gebhard believes there are no definitive published figures but estimates the total gross written premium is £1.5bn (excluding significant one-off projects). Zurich provides quotations for 60% of the business provided by brokers in comprehensive presentations, while other quotes are rejected on grounds including poor claims history, underwriting strategy and insufficient information.

Markets

The overall market appears healthy, though some profits have been hit by high materials and energy prices. There are quarterly and monthly reports tracking construction output and confidence by organisations such as the Chartered Institute for Purchasing and Supply.

Wilson says Giles is looking to expand its construction team and achieve growth of between 5% and 10% in 2006. Giles brokers for the development of offices, industrial units, housing, shopping complexes and hotels.

Across the UK, a shortage of homes has led to significant housing projects, especially as more single people invest in homes, while the 2012 Olympic Games are likely to further fuel the boom the capital has enjoyed for the past five years.

The government's own building plans see billions of pounds of taxpayers' money devoted to the development of new schools and hospitals. The industry has a certain dependency on public sector investment. The Chancellor's attitude to public borrowing could have an impact on the sector, but this is something about which economist David Stubbs at the Royal Institution of Chartered Surveyors is optimistic: "Public sector investment is set to grow rapidly and the industry should soon start to reflect the pick-up in housing market activity."

Industrial construction is another large area in which brokers can prove their worth. An extract from the UK Construction Market Research Report market forecast for Market & Business Development - a market-research publishing company - states: "The construction industry faces a more challenging economic environment in the short term. Overall construction output will avoid recession, but growth will be dependent upon the delivery of government investment. Furthermore, the industry will have to deal with a weakening private sector demand and rising energy and raw material costs. Despite this, strong real-term growth of 22% is anticipated for construction output between 2005 and 2010."

As the company building the new Wembley Stadium, Perth-based private construction company Multiplex, is finding out, it is not just the weather that provides obstacles for contractors. Meeting deadlines requires enormous organisation based around costs, supply and labour. A media storm will erupt if the stadium is not completed on time and, in construction, time is money. The pressure to finish on time bearing down on Multiplex also stems from the Football Association itself, which has already marked Wembley as this year's venue for the FA Cup Final.

Rather than insurance contributing towards compensation for any delay, this is usually negotiated separately in advance through penalties built into contracts between the owner and the contractor. However, when the delay is caused by an identified and insured peril such as fire, it can be covered through non-negligence indemnity insurance.

There are myriad other risk-management issues tied up in insurance negotiations.

In a survey among companies in the design-and-build sector - engineers and architects - 90% of respondents said risk was increasing because contracts are becoming more complex and more demanding.

Meanwhile, 20% of respondents said clients are becoming more difficult and are setting lower budgets and unrealistic deadlines. Furthermore, the report states: "With lower margins, contractors are pushed to the limit, forcing them to compromise on quality and safety."

Stephen Roberts, managing consultant, at Marsh's risk consulting practice, says: "Risk management in construction has been a massive issue over the last 10 years. A decade ago, stakeholders and lenders would pay lip service to risk management, but the tide has turned."

He continues: "It starts with the board, which must demonstrate it is looking after all management responsibilities. Corporate governance is becoming more important; insurers have become hungrier to see more information on risk."

Often in construction there are joint ventures. Therefore, operational risk management may be carried out between two or more parties. Roberts says: "Most of our business is done with the owner rather than the contractor." David Boss, senior vice president, construction power and utilities, Marsh, says: "Control by the owner is paramount, including looking after the financiers, lenders and contractors."

Environmental concerns

In addition to natural catastrophe exposure, environmental liabilities should be considered, such as the contaminated-land regime. Environmental consultants may be required to carry out extensive tests. Pollution legal liability covers against unknown pollution emanating from the site, while contractor's pollution liability is designed to cover unforeseen pollution conditions arising from operations.

There are further hazards. Gebhard notes recent trends of water-damage claims, where water has escaped on-site during construction projects. In addition, he cites arson and a rise in theft at construction sites. Brownfield sites are more vulnerable to theft because they are usually closer to urban areas than greenfield ones.

Cover for legal expenses, transit, rewriting plans and documents, business interruption and asset protection are all examples of available cover in a construction insurance contract. Third-party liability, for example protecting property in the surrounding area, should be considered.

Health and safety

Health and safety needs to be managed carefully. Unsurprisingly, given the day-to-day physical dangers, construction has the poorest safety record of all UK industries. The HSE grimly reports a staggering 2800 people have died from injuries received as a result of construction work in the last 25 years. And this problem is not dissipating - 71 workers died between April 2004 and March 2005. Causes of these accidents include falling through fragile roofs, being struck by excavators and being crushed by collapsing structures, according to the HSE.

Gebhard says: "According to statistics, between 6% and 8% of the UK workforce is in construction, and it accounts for 20% of all accidents and 31% of fatalities."

There are a number of common injuries in construction including vibration white finger, dermatitis, musculoskeletal disorder and hearing loss. They pose a potential significant cost to insurers given the long-term care involved and claims could take up to three years to be realised. Rehabilitation, court costs and compensation are insured under the employer's liability cover.

Gebhard warns: "In health and safety, 'health' is often the silent word."

Interactive training, behavioural risk improvement and going beyond compliance requirements are important elements in ensuring the quality of health and safety. Improving in these areas will help gain insurance contracts and reduce premiums.

FURTHER INFORMATION

Department of Trade and Industry www.dti.gov.uk

- Construction Industry Research and Information Association www.ciria.org.uk

- Construction Confederation www.constructionconfederation.co.uk

- Building magazine www.building.co.uk

- Department for Environment Food and Rural Affairs www.defra.gov.uk

- Royal Institution of Chartered Surveyors www.rics.org

- Health & Safety Executive www.hse.gov.uk.