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The Insurance Broker’s view

Dominic Lion is a chartered real estate insurance broker at Gallagher, a global insurance brokerage, risk management and consulting firm.

Here is his thinking as to why now is the time for timber.

Can you give us an overview of the construction insurance market today?

The construction insurance market today is hard. It is turning a corner from probably 10 years of underpricing, overcapacity. So as a result, insurance companies are losing money and I think we are moving into a period now where insurers are taking back control and the pen and being much more prescriptive about what they write, if anything and really looking to make profits and not worrying too much about the top line.

How have things changed in the last few years?

We have been in a place for a number of years where insurance in construction was very easy to come by and getting cheaper. As a broker it's great news because it was always a good message to clients – your premium's come down or your price is cheaper on this project than the last one. This is the first time in my experience where we've seen a reversal of that and rates going up quite significantly and having to give bad news to clients.

Is it the construction industry's fault?

It's undeniable that in the last 10-15 years insurance claims on construction sites have increased and the severity of them have increased. Escape of water has been a really big one and there are many reasons and many different theories why that's happened. Many point to changes in plumbing technology and push-fit connections in plumbing. In the old days of copper and something was welded it was sealed, whereas now with push-fit joints they are prone to expanding and/or cracking and failing under pressure. Is it the industry's fault for not having enough men on 24-hour watch, or not installing enough sensors because they are all concerned about their margins? There are 101 reasons why this has happened, some of it is the construction industry's fault. Some of it is the insurance industry's fault for undercutting one another, becoming too cheap, not asking enough questions and therefore not truly understanding the risks they are underwriting.

Are you seeing clients more interested in the climate change agenda these days?

I feel there has been a sea change within the sector within which I work, real estate specifically and, probably wider than that, in the last nine months, since the turn of the year. There seems to have been a real renewed effort and push towards environmental credentials and being environmentally and socially responsible. There was probably a different point of focus in 2019 because they, as a collective, have realised that the environment is something they need to take very seriously. I think also it's been driven from the very top down, so the people with the money are saying we want to invest our money responsibly and, if you don't do that, we will send our money elsewhere.

So what is this driven by?

I honestly believe that people in our society have finally realised that there is an environmental crisis in our world and we all have a collective responsibility to respond, to ensure there's a world there for a few generations. I think government are helping to drive it and their carbon neutrality targets are a great start, but I think it was always going to take a change of mantra from the top of the big corporates to really start to see things actually happen. I think they have decided that they do have a responsibility and they can make a difference and they want to and that's really positive.

Do you think the insurance industry has a responsibility to invest in the timber industry and support the aim to be carbon neutral?

Unfortunately there will always be the balance of commerciality, versus morals and ethics and insurers and brokers are corporate entities who need to make a living to survive. I think the debate at the moment is how they balance those two off against one another; so how they make money whilst advancing the environmental agenda and making sure that we do hit our carbon neutral targets. So, is timber currently a commercially viable option in the sense of can we find a price point as a response that is acceptable to all parties and that makes this work for everyone? I think that's the main challenge at the moment. Finding that middle ground where, as we sit here today, insurance for timber is expensive and developers are saying, to a level that they never said before, we want to build in timber unless there really is a reason why we can't. Insurers are saying that now we understand your appetite for this is greatly increased than what it was two years ago let's find a solution that works, because as we understand it and as we know at present, timber is still high risk therefore we do need to charge you more. There's no getting around that but how can we find a middle ground where you are putting the right measures and the right protections in place and doing the absolute utmost that you can so you make this timber development as safe as possible so that we can bring that price down? Then you can build it into your model and it can be commercially viable for everyone to find a happy middle ground.

What do insurers need to do in order to be happy to insure timber construction projects?

So an insurer on a given scheme will have a list of information requirements and it will vary by insurer because that's the nature of they have slightly different takes on things. So, essentially they might have, for arguments sake, 15 questions for a steel/concrete building. For a timber building that list might be 30. What the main challenge we have at the moment is, I don't think, they necessarily know what those extra 15 questions should be, because they don't necessarily fully understand the increased risk of timber. We know that it's a bigger risk, but we're not quite sure exactly why and how. Insurers right now are desperate for more information. The challenge we then have is collating that information but also giving them the time to read and understand the information such that they can make a honest judgement of it. Therefore, I would say there is absolutely no point at which it would be too early to engage a broker or insurer right now on a timber scheme. Get them involved at stage one. Insurers might even want to have a say in the design, so why not talk to them. They may not, but at least if you've asked the question and they know that you're bringing a timber risk to the table and they know roughly what it looks like, they can get their head around it and be comfortable with it. That gives you, as a design team, that much more comfort that you're heading in broadly the right direction.

Who should be providing the extra information required?

A big part of the challenge is knowing who, as brokers, to ask those question of.  You tend to have one main point of contact on a given scheme and that can vary hugely – that can be an engineer, it can be an architect, it can be a lawyer, or it can be just about anyone that is decided is the insurance person for that scheme. There's not necessarily a consistent approach across developers as to who is responsible for insurance within their team that then liaise with the broker – that can often make the challenge slightly harder. It then becomes that poor individual's responsibility to disseminate those questions correctly within their team to then get their answers back. Insurers base most of their underwriting decisions on experience. They like data and they like experience. They like to have been underwriting a sector or product for some time and have built up historical collection of data that tells them, these are the marks of address, these are the marks and the bad risk, this is how we expect something to perform. Unfortunately, mass timber is a sector where they don't have much data, so they don't have much to work off. This sector, the timber sector, hasn't necessarily provided them with any of that data either where that could be an avenue to help to help insurers.

What motivates you to champion the use of timber construction?

When I first got involved in construction, at Gallagher, we happened to be involved in insuring what, I think is still the largest cross laminated timber residential structure in Europe. It opened my, and our collective, eyes to this market in a way that we didn't really know existed before. That was obviously a challenge at the time to insure and that was in a soft market. We still insure that building and it's now a harder market and becoming almost harder by the year to insure it, even though it's complete and was well built. Gallagher is very much interested in doing the right thing. I think the company is very ethically minded and strong in its principles so it is keen to be doing the right thing, which is one of the reasons I like working for them. On a micro level we, as a division, realise that we need to be doing the right thing, this is only a growth market . It is the right thing to do, but also a huge opportunity, if done correctly. There really only seems to be one way to take on the huge challenges set by the government around carbon neutrality by 2050 in the built environment. The only obvious solution right now is timber in terms of carbon credentials. Unless I totally missed something, it seems to be the only answer right now and therefore something that we have to understand, we have to embrace, we have to make work. Otherwise we'll get nowhere near those targets. There's no other material out there.

 
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