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Risk in Context

International Insurance Coverage: Might Construction Companies Be Spending Too Much?

28 November 2019

Construction companies may be paying a big price for their cautious approach to insurance. A global program might be the answer and companies can purchase this coverage without exposing themselves to financial and other penalties relating to compliance breaches.

Contractors with overseas interests may be overspending on their construction insurance. The increased risk of regulatory breaches, due to regulatory differences between territories, is prompting some construction risk managers to play it (too) safe when it comes to insurance.

Instead of benefiting from the economies of scale offered by arranging global insurance programs, they are burdening themselves with the administration and cost of purchasing separate contractors’ insurance policies in each territory in which they operate, in order to meet regulatory requirements.

Global insurance program benefits

Opportunities are opening up for construction companies of all sizes globally. At the same time, contractors' and developers' insurance has evolved into a global industry, with local, regional, and international underwriters competing for business, which provides opportunities for savvy buyers.

By using a global program, a construction or civil engineering company widens the scope of local, regional, and international construction insurance companies competing for its business. This enables it to leverage its insurance spend.

This type of program incorporates broad coverage and high limits of indemnity. It can be arranged in one of the global insurance hubs (for example, London or Singapore), and then delivered in individual territories through local policies fronted by regulated insurers.

Why are construction companies cautious?

Achieving legal compliance is increasingly important for the modern risk and insurance manager. Financial governance rules are being tightened globally, and emerging economies are enhancing their compliance procedures. This has led to more scrutiny than ever from legal and regulatory bodies.

As a result, there is more chance of local breaches being penalized. Construction companies could face regulatory penalties and/or legal action. They could also suffer reputational damage for compliance-related failings.

One of the challenges related to a global program is that a non-admitted (that is, insured out of territory with unauthorized insurers) global program might not accommodate many local laws and regulations.

Choosing the right partner

It is of crucial importance that building firms work with construction insurance brokers experienced in placing tailored, regulation-compliant global programs.

In order to choose the best broker for their needs, risk managers should quiz potential broking partners on their experience and approach in key areas. These include (but are not limited to):

  1. Total Cost of Risk (TCOR)

    When companies explore global program options it is worth asking a prospective broking partner how they would address the following:
    • Pool each country's risks into a single program, providing a global view of the company's risk profile and how this would deliver higher limits (for some or all businesses) at a lower cost.
    • Deliver risk diversification whereby the global risk portfolio is assessed as a whole and, as a result, an international program could offer a single global limit, eliminating the need to pay for multiple standalone limits across different geographies.
    • Identify an optimal point of risk retention — typically, the acceptable global risk retention, based on the company's risk strategy, is higher than that which subsidiaries would purchase locally.
    • Eliminate duplicate covers through the greater transparency provided on all aspects of coverage under a global program structure.
  2. Coverage

    Global programs must focus on the interests of all worldwide operations, not just the head office. Companies are acutely aware of the restrictions that apply in some of the territories in which they operate.

    Ask potential brokers how they would design a global insurance program that accommodates the restrictions in some of the territories in which your business operates, and complies with cross-border regulations and their program administration requirements.
  3. Control
    While there are advantages to global insurance programs that maintain local autonomy, it can be challenging for management to maintain a holistic overview and understand regional emerging issues or trends across the businesses. Potential brokers should be asked how they’ll provide global information in areas such as:
    • Claims, incidents, and near misses.
    • Insurer aggregation and security.
    • Benchmarking: internally and against industry peers.
  4. Convenience and Consistency

    Appointing numerous brokers across differing regions can mean a lack of consistent implementation or reporting processes. In order to ensure consistency ask potential brokers to explain the ways in which they ensure the client receives a consistent service experience, regardless of location.

Guy Fitzgibbon

Senior Partner