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Advanced Gas Turbine Insurance: The New Rules for Going to Market

For those working with prototypical technology such as advanced gas turbines, leaving their insurance to the last minute means having to weather the worst of any price hikes, restrictive wordings, greater exclusions and higher excess.
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By Matthew Kendle , 

Head of International, UK Construction

01/09/2021

During a contracting market, a technical understanding of your unproven technology is only the start when seeking construction insurance.

"Better three hours too soon than a minute too late" — William Shakespeare.

Construction insurance as we know it didn't exist during Shakespeare's time, but his sage advice still applies. Because in a contracting market, it's never too early to start marketing your project to insurers.

The market has been tightening for 18 months or so, and contractors, owners, and developers who leave their insurance to the last minute may well have to weather the worst of the premium increases, and diminished coverage, that characterise a transitioning market.

The situation is even more acute for those working with prototypical technology, such as advanced gas turbines, due to insurer worries about unproven technology.

By putting in the time before going to market, however, and working closely with a broker, construction professionals can minimise rate increases and restrictions in coverage.

Why is the Construction Insurance Market Contracting?

Some 18 years ago, rates started to drop and cover widened as insurers sought to win business, following an influx of capacity into the insurance market.

As technology has advanced, however, construction projects have increased in scale and complexity. Their risks are larger, meaning project-related disputes or losses have resulted in costlier settlements for insurers.

The focus on supply chain resilience following contractor and supplier collapses, including some high-profile global cases, caused insurers to become increasingly wary about providing cover to the construction sector.

Additionally, within the past two years, a series of huge project claims have been made against a backdrop of larger-than-modelled natural catastrophes, and unexpected events such as flash floods in arid regions. This has resulted in hefty payouts from insurers on top of "normal" attritional losses — which are paid out of a smaller premium pot — leading to a squeeze in capacity and a reduced reinsurance pool.

The downturn caused by COVID-19 has exacerbated these issues.

How to Achieve the Most Cost-Effective Terms

Compiling presentations for insurers has become more important, and also more time-consuming. Underwriters are looking for more detailed information from construction firms regarding their business operations, supply chain processes, and project risk management. This is particularly relevant for those using cutting-edge or prototypical technologies.

By allowing plenty of time, construction firms can make best use of their brokers' technical expertise and market relationships, enabling them to differentiate their projects from their competitors. A two-stage process is recommended:

  1. Readiness and Strategy
    • Develop a good understanding of the technical risk you are taking to market, especially as it relates to new gas turbine technology. Questions to ask yourself include: What are the changes and evolutions in the design and specification? Where does the unit sit in the fleet? What are the leader hours? When is the estimated first fire?
    • Appreciate your project risks, and make sure you can articulate a strong risk management philosophy.
    • Ensure underwriters' key concerns and hot topics are addressed. Collate a strong, detailed underwriting submission, supported by your broker. Focus on the testing regime and any contractual protection via warranty.
    • Devise a considered global marketing strategy. Don’t restrict your focus to the individual underwriters most likely to produce favorable terms.
    • Consider any contractual/counterparty requirements.
  2. Market Presentation
    • Work with your broker to devise a written submission and put together a roadshow (or a virtual roadshow depending on social distancing requirements).
    • Set realistic objectives. Develop an understanding of the differences between the coverage level you need and the coverage level you'd like.

Above all, remember that your broker's value on this type of project far exceeds the placement alone. By giving them plenty of time, you can take advantage of their advisory capabilities, particularly during contractual negotiations where risk retention is determined.

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