Tim the Tradie’s quest for PI insurance – Part 1

In the first of three articles, James Aclis details the process of attaining professional indemnity (PI) insurance through the eyes of fictional character, ‘Tim the Tradie’. Tim discovers that getting PI insurance in Australia’s residential building industry is…hard. Follow Tim as he begins to investigate why his PI insurance is so difficult and expensive to get, and what events lead to this current predicament.

Tim the Tradie was confused and frustrated. It was Monday, and already he was looking forward to the weekend.

“You mean…I can’t get insurance?”

Tim’s goal over this week was simple – to figure out what the heck was going on with the building industry and his PI insurance. It was an issue for him and his developer boss.

“Tim, don’t worry, I can get you insurance!” came the reply from Barbara. Tim could tell even through the phone that Barbara was smiling with all the positivity she could muster. After all, that’s why he chose her as his insurance broker – she was always positive.

There was a pause, then Barbara the Broker continued. “It’ll just be more expensive, and with a few exceptions…”

A cyclical market, but worse than ever before

Tim had heard the story from Barbara in some of their previous conversations. The insurance market was hardening.

Apparently, it was normal for the insurance market to go through cycles – soft and hard. Or as Tim understood it – cheap and expensive. And right now, in 2021, the market was hardening.

Actually, from what Tim had been told, some say that the market started hardening in 2017 when the Lloyd’s of London insurance market experienced a $2 billion loss. The Lloyd’s of London players said enough was enough and decided to undertake a review of who and what they insured, with the goal to cut the worst 10% of them. And since Lloyds’ was one of the biggest insurance markets globally, players in other insurance markets around the world soon followed suit.

And the hardening of the insurance market continued.

Insurance premium rates rose. Insurance capacity shrank, in some situations to the extent that some couldn’t even get insurance at all. Tim had only moved to Australia last year, but back in the UK, he remembered some of the things his friends had told him about the insurance troubles they were seeing. Postman Pratt said his employer was facing much higher premiums on their motor fleet of delivery trucks. Fireman Pham said that many homeowners he spoke to were paying more for their home insurance, and even worse, some of the houses he saved weren’t even insured, as the owner said they could no longer afford it.

And with the professional indemnity insurance sector, many were saying it was the most challenging insurance market with some of the highest rate increases seen in recent memory.

Of course, there was more to it.

Like how climate change had led to a resetting of insurer’s CAT models to account for the ever-increasing impact of natural catastrophes. Or how COVID-19 had only made things worse and put added pressure on insurers’ profitability and capacity which in turn indirectly impacted the quality of risk selection in all lines of business. Or how despite the insurance market’s normal cyclical nature, future soft states would never fully cycle back down to previous levels.

But after the mention of hard and soft, Tim had already lost concentration and had mostly thought of cheese.

“Fine,” replied Tim, “I get that it’ll be more expensive. But what’s this about there being exceptions? What’s been happening in the construction industry?”.

Barbara paused again. “Have you heard of Grenfell?”

A risk that insurers won’t accept

Since his talk with Barbara, Tim had looked more into the 2017 Grenfell incident. Of course, he had heard about it when he was still in the UK, it was one of the biggest building disasters in his lifetime! And there was one part of it that was a key risk, if not the key risk – aluminium composite panel, also referred to as flammable or combustible cladding.

The cladding didn’t cause the fire in the Grenfell Tower. But when a fire did occur, the cladding and insulation acted like a chimney, melting the cladding, and spreading the fire rapidly upwards. 72 people died. It was the worst UK residential fire since World War II.

As Tim continued his research, he had fallen down a rabbit hole of cladding incidents in Australia. He hadn’t realised that even before Grenfell, Melbourne’s Lacrosse Tower had experienced a cladding-fuelled fire in 2014. Another cladding fire had hit Melbourne’s Neo 200 apartment building in 2019.

But it wasn’t just cladding incidents.

Major structural defects had also been a widespread issue, causing mass evacuations from Opal Tower in 2018 and Mascot Towers in 2019. More incidents continue to be brought to almost every week as part of a NSW parliamentary inquiry into building standards. A survey from the Office of the Building Commissioner and Strata Community Australia NSW estimated that almost 40% of new apartment buildings in NSW have a serious defect.

So, what does this mean for insurance? In short, insurers aren’t willing to cover this risk.

Much like asbestos back in the 1980s, flammable cladding was a latent risk. It was difficult to determine the exposure, that is, exactly which buildings had it – in many cases, you had to take a core sample of the building’s external cladding to determine if it was the type to cause another Grenfell. And there was significant uncertainty as to when the risk would emerge – it could sit in a building without any problem for years, decades even, only becoming evidence if there was a fire.

And owners were reluctant to proactively investigate it. If they found the cladding in their building, they suddenly had a duty to do something about it. But it wasn’t certain whether they’d be able to recover the cost of replacement through insurance – after all, if there wasn’t a fire, just having the cladding wasn’t an insurable event, was it? If insurers didn’t pay, then would owners be totally on the hook?

But the problem impacted more than just the builders and developers who couldn’t get full, affordable PI insurance. It meant that building owners were more at risk. People that owned an apartment were the primary ones at risk if something went wrong with the whole apartment tower. And this was impacting confidence in the building industry as a whole.

But Barbara had said that the government had been making changes to building regulations and had recently been adapting to the emergence of this risk.

Seemed like Tim had more investigating to do.

Keep an eye on Actuaries Digital for Part 2, where Tim investigates who’s responsible for paying for an event, along with the temporary changes that government have made to deal with this insurance gap. This calls for a visit to Tim’s eccentric lawyer, and a chat with Tim’s long-term business partner…


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