Is contractors all risks insurance really so unprofitable?
What we need is an insurance company with a vision
By Itzick Simon
The Contractors All Risks insurance sector has been undergoing an upheaval in the last two years and all major players in the sector have been feeling the brunt. Contractors are having difficulty in arranging Contractors All Risks cover for projects and even when they do, they find that premium levels have almost doubled compared to average premiums seen between the years 2019-2021 (and market analysts believe we haven’t yet reached the peak).
Inevitable? Certainly not. In this article I will outline some of the reasons for the current market situation and explain why, in my opinion, just like any other crisis, challenges can present opportunities, especially for the Israeli insurance companies who could turn things around for the best by filling the vacuum that has emerged.
How do hurricanes in the U.S.A. affect construction projects in Tel Aviv?
Let’s start from the very beginning – a very good place to start. Contractors All Risks insurance in Israel relies on a mechanism whereby Israeli insurance companies are heavily dependent on reinsurance. In other words, global reinsurers have a financial interest in the outcome of insurance claims made in Israel.
For the last several years, the reinsurers have been suffering huge losses from a dramatic global phenomenon that has sent the actuaries back to the drawing table: Climate change.
There’s no need to elaborate on sea levels rising due to glacier melting, severe storms, floods and other natural catastrophes around the world, all of which have resulted in huge losses which global insurers and reinsurers have paid for.
Over the last two years, reinsurance company executives have been pressured by shareholders to rethink their plan of action and filter out unprofitable classes of insurance and business from countries which have shown unprofitable results.
In this context, Contractors All Risks insurance is the focus of attention at present. One of the main reasons for increased Contractors All Risks insurance premiums is an ongoing decline in capacity from reinsurers who are willing to support this class of business. Certain reinsurers have withdrawn completely from Contractors All Risks insurance, whilst others have restricted cover, increased premiums and deductibles and reduced capacity.
All classes of insurance have been affected, but the Contractors All Risks sector in Israel has been acutely affected
It’s important to point out that even though the current crisis is affecting contractors all over the world, the situation in Israel is somewhat unique. Based on data from Marsh Israel, the local representative of the largest worldwide broker (with branches in 130 countries), Israeli contractors have suffered from the situation more than their counterparts in other places in the world.
Data from Marsh shows, for example, that average premiums for Contractors All Risks insurance in Israel more than doubled from 2019 to 2021. For example, the insurance premium for an average construction project with a total contract value of NIS 200 million is paying a premium of around NIS 1,000,000 at best, compared to around NIS 480,000 two years ago.
The hard market conditions are also manifested in increased deductibles. For example, back in 2018 the typical deductible under the Employers Liability section of a Contractors All Risks policy covering a medium sized project was around NIS 10,000, compared to around NIS 40,000 at present. According to data from Marsh, the deductible for Employers Liability claims in large projects can every reach NIS 100,000 or even NIS 150,000. Similar trends can also be seen under the Material Damage section where deductibles have increased significantly and even more so under the Third Party Liability section, where increases of up to 500% have also been seen.
Why is the impact on the Israeli market so severe?
There are several reasons. Firstly, the construction industry is considered to be one of the most hazardous sectors and its “contribution” to the number of people injured in the workplace is probably the highest.
Innumerable work accidents, some of which were fatal, have put a strain on the entire industry, and contrary to common believe, efforts are underway all the time to improve safety at work conditions. In addition to human suffering, severe accidents and injuries in construction sites lead to insurance claims for millions, including substantial court awards for loss of future income capacity, in line with the “Lost Years” doctrine in Israeli common law.
According to data published by the State Comptroller, the number of fatal injuries in the workplace between the years 2011-2018 was higher than the average in the European Union, and at some points in time it was more than double.
Increased premiums for Contractors All Risks insurance can, to a certain extent, be attributed to the National Insurance Institute
The phenomenon of National Insurance Institute subrogation claims is the most influential factor on the Contractors All Risks insurance market in Israel. After the National Insurance Institute acknowledges a claim for a work accident at a construction site, it pays substantial benefits to the victim, or their family. In certain cases the National Insurance Institute can subrogate their losses against the general contractor and/or the principal or other third parties it views liable for occurrence of the event, or for safety defects leading to the accident. The claim then finds its way to the insurance company that covered the project.
Provided that the Third Party Liability section of the policy includes the optional extension for National Insurance Institute subrogation claims, the insurance company ends up reimbursing the National Insurance Institute for the discounted value of benefits payable to the victim and/or their survivors.
Frivolous tort claims – A national sport
Another factor touches on the question of whether the insurance companies dedicate sufficient resources to defend claims, in other words do they invest the resources required for the in-depth investigation of work accidents, establishing the facts in real-time and vigorously defending the claim.
Unfortunately, the insurance companies in Israel and the Israeli legal system have a tendency to settle claims out of court even though in certain cases the defendant is not liable and the claim could be successfully defended by completing the legal proceedings. Owing to the reluctance to vigorously defend claims there is a sense that it is quite easy to “get some money out of the insurance company” for very minor accidents involving cuts and bruises.
The reaction of the Israeli insurance companies to the changes dictated by reinsurers? Overcautiousness
How have the Israeli insurance companies reacted to the hard market conditions lead by the reinsurers? Initially and as one would expect, they were overcautious. This attitude was manifested in increased premiums, increased deductibles, highly selective underwriting to the point of declining cover for projects which are perceived to be complex, such as projects involving historical building restoration, adding verandas, storerooms and bomb shelters to existing apartment buildings and the like.
The general rule is clear: The higher the risk, the more stringent the underwriting. This overcautious strategy can be justified as being a healthy business instinct but in my opinion it is part of a wider set of changes relating to the self-perception of the insurance companies.
Insurance company or investment house?
Over the last few years we have seen that the Israeli insurance companies are becoming more investment oriented. Many of them are now some of the largest fund managers in the market and asides their traditional insurance activity, they manage provident funds, pension funds and advanced study funds and companies that manage short and long term funds (predominately through unit trust funds).
It often appears that as their profits and accrued capital increase, they forget their primary function – an insurance company. Indeed, why bother exposing yourself to underwriting risks when you can achieve much better profits for shareholders from investment activity?
Another important factor is the limited number of players in the Israeli insurance market. I travel frequently to international insurance conferences and meet insurance executives from various countries and what I hear never fails to surprise me.
Let’s take Portugal for example: A country with 10 million citizens and 300 insurance companies. Israel, on the other hand, has a similar number of citizens, and only 13 insurance companies (with the five largest groups holding the lion’s share of the market).
In my opinion, the Commissioner of Insurance should be reminded of this fact every day. The regulator has a duty to create the conditions to enable new insurance companies to enter the market, including foreign companies, who are basically barred from operating in Israel due to draconian regulations.
One of the main barriers is the fact that a foreign insurance company which is not a licensed “Israel insurance company” or “admitted foreign insurer” according to the definition of the Supervision of Financial Services Act (Insurance) – 1981, cannot bring a subrogation claims in Israel directly against the party who is liable for the indemnifiable loss.
Incidentally, I would point out that the Supreme Court recently handed down a landmark ruling concerning this very issue of foreign insurers filing subrogation claims in Israel, although it was an isolated and specific case, unrelated to construction insurance and it would be difficult to draw conclusions from it about future cases.
High market concentration – Israel compared to Portugal for example
High market concentration – Israel compared to Portugal for example
The increase in premiums for Contractors All Risks insurance in Israel as a response to the difficulties with reinsurance is not only a problem that should be viewed in a narrow prism of premiums, deductibles and the like. The bottom line is that this situation could have much broader ramifications, and all efforts should be made to avoid a situation whereby the insurance industry ends up stunting growth and expansion in the entire construction industry, by making it impossible or too onerous to arrange insurance for complex civil engineering and urban renewal projects which are perceived to be complex. The same applying to architects, engineers and other white-collar professionals who need Professional Indemnity insurance for their involvement in construction projects.
The National Economics Council devised a national strategy according to which it will be necessary to construct around 60,000 apartments a year to satisfy the demand for housing in Israel (around a third of which in the greater Tel Aviv region). Unfortunately only around 47,000 apartments are constructed per year, i.e. a “deficit” of around 10,000 apartments per year, a deficit which will increase and accumulate as time goes on.
The housing crisis is connected to various other factors (such as selling government owned land and improving transportation means), but the construction sector has an important function. As long as contractors in Israel find it difficult to arrange insurance cover at reasonable terms, the pace of construction will slow down correspondingly. Experience shows that a hard insurance market also delays timetables when complex projects are held-up for several months until insurance is arranged.
The solutions and opportunities – which insurance company will accept the challenge?
Having outlined the reasons for the current situation and the problems the construction industry is facing with insurance arrangements, I will try to show the light at the end of the tunnel. I will now present a variety of solutions and a proposed manifesto for an insurance company to cross the Rubicon and take advantage of an opportunity for itself, and the entire market.
I will firstly address the conduct of the insurance companies who decline to cover project which appear to be too complex and too high risk. In many cases the Israeli insurance companies could actually cover the project but avoid investing the resources needed to analyse the project in detail and establish, from an engineering perspective, whether it is possible to find a satisfactory solution. On many occasions the companies prefer to avoid entering into the unknown with the potential for problems. I personally believe that a solution can be found, even cases which appear to be complex at first glance.
Example: The case of the Tower of David in Jerusalem
I could cite numerous cases, but one of them most adequately reflects the approach that in my opinion could be adopted. My firm recently became involved in a complex and challenging project involving the construction of a new visitors centre at the Tower of David Museum inside of the walls of the old city of Jerusalem.
The developer found it very difficult to arrange insurance due to various engineering related challenges including numerous demands by the Antiques Authority, a concern that the walls of the old city might collapse due to deep foundations being excavated near it and construction works in a congested tourist site which continues to operate during the project, and more.
We brainstormed with the engineers and consultants, studied the project in depth (a construction engineer is employed in our office on a full-time basis), double-checked the working assumptions concerning the existing foundations of the Tower of David, or lack of them, and arranged for a specialist geotechnical engineer to prepare a soil survey.
Following stern efforts, the engineers revised their plans and improved the engineering and safety aspects of the project. We packed all of this into a survey which addressed the most sensitive aspects of the project and provided solutions for specific risks we identified. Thanks to the excellent cooperation we merited from the insurance company that was involved in the process and agreed to cover the project, subject to specific conditions and an adequate premium, we managed to arrange a policy which enabled this major project, at a national heritage site in Jerusalem, to proceed.
This example shows that it is certainly possible to underwrite complex and challenging projects, and I’m confident that something that worked inside of the walls of the old city of Jerusalem can certainly work anywhere else in Israel.
Plan of action for an insurance company with a vision
Crises also present opportunities and this is the call for an insurance company to take the challenged. Now that premiums are sky high, deductibles have increased substantially and protection demands are very stringent, an insurance company with a vision that understands that they can fill the vacuum that has emerged and take advantage of the situation could gain a substantial market share at conditions and premiums that could prove to be very profitable:
Plan of action for an insurance company with a vision
Crises also present opportunities and this is the call for an insurance company to take the challenged. Now that premiums are sky high, deductibles have increased substantially and protection demands are very stringent, an insurance company with a vision that understands that they can fill the vacuum that has emerged and take advantage of the situation could gain a substantial market share at conditions and premiums that could prove to be very profitable:
Underwriting with forethought and influence – It’s quite possible to underwrite with foresight and influence, by creating a framework for policy conditions corresponding to the specific risks of the project and implementing an approach of finding ways to consider how to overcome difficulties (even when they appear to be unpassable) before automatically declining the risk. Categorising certain types of projects or occupations as an automatic “decline” can largely be avoided. Almost every project and occupation can benefit from insurance cover at conditions which correspond to the risk, without exposing the insurer to unknown or unquantifiable risks.
Conducting an in-depth analysis of the nature of the project – Getting to understand the plans, the work methods including deep foundations and their compatibility with the soil conditions. The outcome: Identifying the risks and pitfalls and formulating practical solutions that can be implemented.
Considering the reputation of the building contractor – Selecting a building contractor with proven experience from other projects, reviewing their previous insurance history, work accidents, fines, regulatory sanctions and the like.
Reviewing the conditions at the work site – Congestion, proximity to neighbouring buildings, survey reports to document adjacent buildings, proximity to buildings with specific activities (such as educational institutions) and the like.
Applying adequate protection measures – Insisting on protection measures which are commensurate with the risk. This is a very complex topic in itself and I will explain. We recently arranged cover for a project involving excavating under part of an existing building. The cover was approved only after the client agreed (contrary to their previous plans) to evacuate the residents from the building, until construction of the underground car park was completed, and a specific increased deductible was applied for damage to the existing building.
Commensurate pricing and deductibles – Applying deductibles which correspond to all of the above, depending on the individual characteristics of the project, the client and the building contractor. In this context, developers also need to internalise the concept that when they enter into complex and unusual projects, they need to bear a certain level of the insurable risk themselves, on account of their profit.
Combatting the phenomenon of frivolous claims – Combatting the intrinsic culture of making frivolous claims, and the situation whereby insurance companies make every effort to mitigate losses by reaching quick out of court settlements. Making claims for cuts and bruises have unfortunately become a national sport in the construction industry. Insureds and insurance companies need to work together to repudiate such claims and see legal proceedings through to the end. I will give a recent example of something that happened in our office. The insured was confident that they were not liable and decided to go to court themselves. After several court hearings it transpired that the alleged injury of the employee was far from being a foregone conclusion. It turned out that he had presented several versions of the alleged event and that the contractor had complied with all safety regulations (for example, the employer had received safety training, personal protective equipment and the ladder involved was not defective) What was the outcome? The court threw out the case and made an award of costs in favour of the contractor. That is just one example and experience shows that losses sustained by contractors and insurance companies as a result of claims arising from mere cuts and bruises (falling or slipping at a construction site) accumulate into a critical mass with long term detrimental effects. If you wish, something that starts as a claim by a labourer at a construction site in Tel Aviv due to an imaginary (or falsified) injury and leads to a lawsuit and a settlement, contributes to the unprofitability of the Israeli market and their reinsurers. By implementing the above, we hope to turn things around and make construction insurance a profitable sector for the Israeli insurance companies and their global reinsurers alike.
