Q1 2023 update
As we approach the end of the first quarter of 2023, generally we have experienced a brighter picture in the global insurance marketplace with improved pricing conditions, coverage and capacity for many global commercial lines of business. That said, the most notable hold out of the hard insurance market remains Project Specific Professional Liability, Commercial Property and Cyber. While many commercial risk insurance brokers, insurers and risk managers are beginning to experience “green shoots” of positive moves in the market and we agree there are positive indicators in many areas but a closer look into each geography clearly shows there are still some more challenging landscapes with certainly some brown spots to address. Even with general market improvements, we believe that it is most critical to highlight the specific areas we expect to continue to be a challenge.
$65B Hurricane Ian being one of the costliest events on record
This negative perspective is evidenced in the commercial property/all-risk market by the reduction in line sizes being noticeably reduced across many risks, coverage restrictions and reduced coverage terms being imposed. This phenomenon occurs most frequently particularly for projects where underwriters have concerns over project risk management and projects particularly vulnerable to a Nat Cat event. This is a logical outcome driven mostly by the recent Atlantic hurricane season; Hurricane Ian being one of the costliest events on record with insurable losses expected to exceed $65 billion USD. In addition, historic and catastrophic floods in Eastern Australia resulted in more than $3 billion USD in losses. The activity throughout the year established a difficult course leading into the reinsurance treaty renewals which resulted in some difficult outcomes and significant cost increases which we are already seeing passed on to insureds.
The global trend in construction spending going into 2023 will be focused predominantly within infrastructure, energy and utilities. While the private sector of the construction industry in the U.S. and Western Europe is facing headwinds of inflation, labor shortages and supply chain challenges for materials, the industry remains cautiously optimistic.
Significant construction activity is anticipated in technology, healthcare and hospitality. Additionally, growth is expected in China, Australasia and in Latin America where each geography will finally return to pre COVID-19 levels. GlobalData forecasts1 that global construction output will grow by just 1.8% in 2023, having posted estimated growth of 1.7% in 2022. The industry is expected to regain some growth momentum from 2024 assuming an improvement in global economic stability.
There are some consistent and specific insights for all geographies that can be garnered by the commentary provided in this document.
The rate environment in North America, across all lines of coverage continues to improve. We anticipate continued improvement through the beginning of 2023. Certain high hazard exposures and contractors with challenging risk profiles will continue to experience rate increases, but the rate of these increases will be tempered as the market improves.
The hardening market dynamic continues and the reductions in insurance premiums and broadening coverage experienced over the previous two decades has now made way for more restricted policy coverage, together with increased rates and deductibles / excesses, as the markets seek to mitigate its increasing risk exposure.
We see a continued trend towards stabilization with signs of further optimism, however cover pressure continues around key areas such as defects, maintenance, natural catastrophe and professional indemnity.
The unprecedented weather events of 2022 saw multiple extreme flooding events across the east coast of Australia. At the time of writing, the insured losses from these events was estimated to be AUD 6.7 billion constituting the costliest natural catastrophe event in Australian history and was the largest single natural catastrophe (Nat Cat) loss event globally outside of the U.S. for 2022. These events have exacerbated an already strained supply chain including materials and labor, particularly in Northern NSW and Queensland. This is having a knock-on effect to the construction industry as a whole which has seen some significant contractors go into liquidation and we expect that these issues will continue to affect the industry into 2023.
We see some signs of stabilization however, higher risk areas continue to attract underwriter scrutiny and a more cautious rating approach.
There are signs of stabilization outside of natural catastrophe exposed risks and we have a watchful eye on project pipeline and inflationary impacts.
1 Global Data, Global Construction Outlook, Quarterly Update, Q4 2022, December 2022, pp. 7.
