March 8th, 2010

Construction & Engineering Renewals at 1/1

Posted at 12:00 PM ET

Simon Hayes, Managing Director

The 2008-2009 global financial crisis had a significant impact on insurers in the engineering and construction sector. Many large and small Contractors All Risk (CAR)/Erection All Risk (EAR) single projects around the world were either cancelled or suspended due to lack of available financing. These developments have caused insurers’ income from construction projects to shrink. Insurers see a need to expand into other classes, such as annuals, power and breakdown.

It is estimated that income for these insurers has declined in the range of 10 percent to 15 percent in the last year. Profitability has declined as well. Competition in this market has increased significantly, along with significant movement of the annual CAR floaters. The competitive struggle has been exacerbated by the entrance of 14 new players in this class, creating excess capacity.

The robust growth of construction and development in the Middle East markets has created tremendous opportunities for construction insurers in recent years. As 2010 has begun it appears that Saudi Arabia, Qatar, Abu Dhabi and Oman will continue their economic development with insurance underwriters hoping that they will be able to hit income targets for these areas. Dubai’s recent economic issues have caused underwriters to be uncertain about the continued investment in new projects there.

In the Far East there is cautious optimism. CAR/EAR business in China remains very competitive but much of it is retained within the Far Eastern markets with little business flowing to International markets. Annual CAR floaters and power business originating in the Singapore markets remain very competitive, apart from major projects which need capacity.

The difficult primary market has impacted reinsurance markets, where income declines of between 10 percent and 15 percent have been seen. The few entities commencing start up operations for CAR insurance business have found it to be increasingly difficult to arrange pro rata covers. As the impact of lower income and attritional losses puts pressure on pro rata margins, reinsurers are concerned about potential profitability levels in 2009 and 2010.

Excess of loss reinsurance remains popular despite premium reductions in subject income. Reinsurers tried to maintain rate on line pricing for 2010, but with subject income down, adjustable rates increased. Cedents managed to push back with some success.

This class remains fundamentally a very profitable class of business, especially for reinsurers with substantial books of business. There were no significant losses in 2009, and rates in 2009 remained relatively quite high. A massive explosion at an under-construction Kleen Power plant in Middletown, Connecticut in the US on February 7 has the potential to cause a major loss in 2010 for insurers and reinsurers. The extent of the loss is unknown at this time.

Reinsurers view engineering and construction insurance as a non aggregation class of property, business which is not impacted by a significant natural catastrophe and consequently, they write as much business as possible. With a limited reinsurance market for this specialist class, property reinsurers are increasingly interested in writing it, but when the market hardens, these opportunistic reinsurers may leave this class.

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