Contractors' Loss Insurance? You Need an Insurance Company with a Vision
May 16, 2023
By: Itzick Simon
The field of contractors' insurance in Israel has been going through a real upheaval for about two years, and all those involved in the industry are feeling the "blow" well. Contractors are having a hard time obtaining contractor work insurance for projects, and even when they do manage to purchase a policy, they find that prices have almost doubled on average between 2019 and 2021 (experts believe that the hand is still outstretched).
Fate? Of course not . In the next article I will elaborate a little on the reasons for the phenomenon and point out why, in my opinion, like any challenging crisis, this can be an opportunity. Especially for an Israeli insurance company that will be able to turn lemons into lemonade by intelligently entering the vacuum that has been created.
By: Itzick Simon
The field of contractors' insurance in Israel has been going through a real upheaval for about two years, and all those involved in the industry are feeling the "blow" well. Contractors are having a hard time obtaining contractor work insurance for projects, and even when they do manage to purchase a policy, they find that prices have almost doubled on average between 2019 and 2021 (experts believe that the hand is still outstretched).
Fate? Of course not . In the next article I will elaborate a little on the reasons for the phenomenon and point out why, in my opinion, like any challenging crisis, this can be an opportunity. Especially for an Israeli insurance company that will be able to turn lemons into lemonade by intelligently entering the vacuum that has been created.
Is a hurricane in North America affecting a construction project in Holon?
In the spirit of the "Simchat Torah" we recently celebrated, let's start from the beginning. Contractors' insurance in Israel is based on a structure in which Israeli insurance companies issue the contractor's policies while relying on reinsurers abroad. In other words, global insurance companies provide the financial backing to deal with claims filed in Israel.
For several years now, global reinsurers have been suffering significant losses due to a dramatic global phenomenon that has ravaged the actuarial calculations: global climate change .
There is no need to exaggerate the rise in sea levels due to melting glaciers, storms, hurricanes, and floods in large areas of the world. All of these have caused enormous damage that has been placed at the door of international insurance companies and reinsurers.
In the past two years, the managers of reinsurance companies have been required by their shareholders to conduct a home inspection and "recalculate their trajectory." Among other things, by identifying "loss-making insurance branches" and areas that constitute significant loss centers.
Contractors' insurance quickly found itself in the spotlight. One of the main reasons for the increase in insurance premiums on contractors' policies is a consistent decline in the number of reinsurers continuing to provide policies in the construction industry. Many reinsurers decided to stop providing coverage for contractors' insurance, and those that remained reflected their continued existence by reducing coverage on the one hand and increasing premiums and excesses on the other.
Everyone is "kidnapping" and contractors in Israel are "kidnapping more"
It is important to emphasize that although this is a global phenomenon that contractors all over the world are dealing with, in Israel the blow is even more significant. According to data from Marsh Israel, the local representative of the world's largest insurance broker (with operations spanning some 130 countries), Israeli contractors have been hit by the situation dramatically compared to their counterparts around the world.
Marsh's data, for example, shows a jump of more than 100% in contractor insurance premiums in Israel between 2019 and 2021. For example, in projects whose implementation costs are about 200 million shekels, the premium is currently approaching one million shekels at best, whereas just two years ago it was less than 480,000 shekels.
The increase is also reflected in deductibles, as in 2018 the employer's deductible in compensation for an injured employee was about 10,000 shekels, today we are already talking about amounts that even reach 40,000 shekels or more. In large projects, according to Marsh data, the employer's deductible even climbs to amounts of 100-150 thousand shekels. The trend is the same in the property section of the contractor's policy, with a jump of tens of percent in deductibles placed on the shoulders of contractors, as well as an increase of about 500% in third-party liability.
In the spirit of the "Simchat Torah" we recently celebrated, let's start from the beginning. Contractors' insurance in Israel is based on a structure in which Israeli insurance companies issue the contractor's policies while relying on reinsurers abroad. In other words, global insurance companies provide the financial backing to deal with claims filed in Israel.
For several years now, global reinsurers have been suffering significant losses due to a dramatic global phenomenon that has ravaged the actuarial calculations: global climate change .
There is no need to exaggerate the rise in sea levels due to melting glaciers, storms, hurricanes, and floods in large areas of the world. All of these have caused enormous damage that has been placed at the door of international insurance companies and reinsurers.
In the past two years, the managers of reinsurance companies have been required by their shareholders to conduct a home inspection and "recalculate their trajectory." Among other things, by identifying "loss-making insurance branches" and areas that constitute significant loss centers.
Contractors' insurance quickly found itself in the spotlight. One of the main reasons for the increase in insurance premiums on contractors' policies is a consistent decline in the number of reinsurers continuing to provide policies in the construction industry. Many reinsurers decided to stop providing coverage for contractors' insurance, and those that remained reflected their continued existence by reducing coverage on the one hand and increasing premiums and excesses on the other.
Everyone is "kidnapping" and contractors in Israel are "kidnapping more"
It is important to emphasize that although this is a global phenomenon that contractors all over the world are dealing with, in Israel the blow is even more significant. According to data from Marsh Israel, the local representative of the world's largest insurance broker (with operations spanning some 130 countries), Israeli contractors have been hit by the situation dramatically compared to their counterparts around the world.
Marsh's data, for example, shows a jump of more than 100% in contractor insurance premiums in Israel between 2019 and 2021. For example, in projects whose implementation costs are about 200 million shekels, the premium is currently approaching one million shekels at best, whereas just two years ago it was less than 480,000 shekels.
The increase is also reflected in deductibles, as in 2018 the employer's deductible in compensation for an injured employee was about 10,000 shekels, today we are already talking about amounts that even reach 40,000 shekels or more. In large projects, according to Marsh data, the employer's deductible even climbs to amounts of 100-150 thousand shekels. The trend is the same in the property section of the contractor's policy, with a jump of tens of percent in deductibles placed on the shoulders of contractors, as well as an increase of about 500% in third-party liability.
There are several reasons. First, the construction industry is considered one of the most dangerous industries in the industrial sector, and its contribution to the number of work-related injuries in Israel is extremely significant.
The many work accidents, including fatal work accidents, pose a challenge to all those involved in the industry, who, contrary to popular belief, are working hard to find solutions to improve the situation. Injuries to workers in serious accidents in the industry give rise to claims that quickly climb to millions of shekels (in light of Israeli case law and in particular in light of heads of damage such as "loss of future earnings" or the passage of lost years).
According to data published by the State Comptroller, the number of deaths in work accidents in Israel between 2011-2018 was greater than the average in the European Union countries, and in some years by 200% or more [1] .
[1] State Comptroller, Worker Safety in the Construction Industry , Ministry of Economy and Industry, Labor Branch (May 2022)
Why are the implications for the Israeli market even more severe?
The effect of the National Insurance Institute's (NII) substitution claims is a primary factor affecting the contractor insurance market in Israel. As is known, after the NII recognizes a worker who was injured or, God forbid, killed on a construction site as a "work injury," it is required to pay him or his family very substantial amounts.
The NSC often files a claim for damages against the main contractor and/or the developer or other third parties whom it deems responsible for the incident, or for being responsible for safety. The claim is then forwarded to the insurance company that insures the project.
If the coverage in the third-party chapter of the policy is indeed properly regulated, the insurance company is forced to return to the NLA the discount on the payments that were paid and/or will be paid in the future to the injured party and/or his survivors.
National Insurance as a cause of price increases in contractual insurance
Another point is related to the question "Are insurance companies able to devote sufficient resources to defense?" That is, do they invest the resources necessary for professional accident investigators, conducting real-time incident investigations, and providing a vigorous defense.
Sometimes it seems, unfortunately, that the insurance companies in Israel and the Israeli legal system have a clear tendency to reach compromise arrangements, even though the defendant is often not responsible and the claim can be dismissed in a full legal process. Under the guise of what I consider to be a poor ability to defend and compromise arrangements, there is a kind of encouragement here for potential plaintiffs, some of whom are not injured but "victims."
"National Sports": Filing tort claims
How did Israeli insurance companies respond to the tightening of conditions by reinsurers abroad? In the first stage, and as expected, they went on the defensive . A defensiveness that was expressed in raising prices, increasing deductibles, tightening the conditions for receiving new insurance, and even postponing insurance for complex projects (or projects that are predicted to be complex) such as preserving buildings, adding balconies or terraces to existing buildings, building additions, and so on.
The rule is clear: the higher the risk a project is assessed to be, the more difficult the insurers make the terms for issuing a policy for it. This defensiveness can be explained not only as a "healthy business instinct" but as part of deeper changes in the way insurance companies perceive themselves.
Israeli insurance companies' response to changes imposed by reinsurers? Defensive
In recent years, insurance companies in Israel have expanded far beyond the insurance market and have largely become a type of "investment house." Sometimes it seems more convenient for them to focus on strengthening the company's capital through investments in the capital market and other avenues (such as real estate investments) and the acquisition of holdings and shares in a wide variety of fields.
We have seen for years that Israeli insurance companies are exhibiting "investment-oriented" activity. They are currently considered the largest investment managers in the economy, as in addition to being insurance companies, they manage provident funds, pension funds, and education funds for the public. In other words, they control the management of pension savings (long-term) and also hold shares in companies that manage funds in the short term (mainly through mutual funds) [1] .
Sometimes it seems that as a company's profits and accumulated capital grow, it "forgets" its original role as an insurance company. Indeed, why risk selling insurance if you can generate good profits for shareholders through an investment arm?
[1] How did insurance companies in Israel become financial powerhouses whose profits do not even come from insurance?
Insurance companies or investment houses?
Another important issue is the small number of active players in the insurance industry in Israel. I frequently travel to insurance conferences and meet with professionals from different countries, and the data always surprises me anew.
Let's take Portugal, for example. A country with 10 million residents that has about 300 insurance companies operating in it. This is while in Israel, with a population of the same size, insurance services are divided between only about 13 companies (which are also more or less organized into five groups).
This data should be placed on the insurance supervisor's desk every day, in my opinion. The regulator has a duty to create tools for new insurance companies to enter the market, including global companies that avoid operating in Israel due to the draconian regulatory difficulties.
One of the barriers, for example, is the fact that foreign insurance companies that do not have an "Israeli insurer" or "foreign insurer" license, as defined in the Financial Services Supervision (Insurance) Law, 5741-1991, are not permitted to file a direct subrogation claim in Israel against the cause of the damage for which they were required to provide insurance coverage.
In a side note, I will note that the Supreme Court recently issued a precedent-setting ruling on the subject that allowed a foreign insurer to file a replacement claim, but this is an isolated case that is difficult to determine whether it heralds the future. The aforementioned ruling also did not come from the world of construction insurance, and it is not certain that it will be possible to extrapolate from it to our case [1] .
[1] Supreme Court: Foreign insurer can sue Israeli tortfeasor
The problem of the minority of players – Israel versus Portugal as an example
Not just an insurance problem but a real threat to the construction industry and the housing crisis
The increase in contractor insurance rates in Israel following the trend among reinsurers abroad is not just a problem that must be examined through the narrow prism of premiums, deductibles, and the like. The bottom line is that the damage may be widespread, and a situation must be prevented in which Israeli insurance companies will constitute a brake and barrier to the construction industry as a whole, while blocking the possibility of purchasing insurance for complex infrastructure and urban renewal projects that are perceived as dangerous, or for essential professionals who have difficulty obtaining insurance coverage.
The National Economic Council has outlined a housing strategy according to which the demand for housing in Israel requires the completion of construction of approximately 60,000 apartments per year (approximately 33% of which are in the Central Districts and Tel Aviv alone). In practice, unfortunately, the annual construction rate stands at approximately 47,000 apartments whose construction is completed. In other words, a "minus" of approximately 10,000 apartments that accumulates each year.
The housing shortage is related to a variety of other aspects (such as land marketing or improving transportation routes), but construction insurance plays an important role. The more difficult it is for contractors in Israel to obtain proper construction insurance, the slower the pace of construction will be. [1] Experience shows that difficulty in obtaining insurance is also reflected in delays in schedules, with complex projects sometimes requiring months to issue a proper policy.
[1] https://www.maariv.co.il/business/realestate/Article-928586
Having described the reasons for the current situation and the problems that currently exist in the construction insurance market in light of the created setting, it is important for me to try and outline a path out. I will try to lay out here a basket of solutions and a call for an insurance company that will be able to cross the Rubicon and seize the opportunity for its own benefit and for the benefit of the market as a whole.
First, I will address the conduct of insurance companies in terms of rejecting insurance for projects that appear, on the surface, to be complex and high-risk. Often, Israeli insurance companies can offer insurance for a project but avoid investing the resources necessary to break down the project data into factors and examine engineeringly how a solution can be provided. More often than not, the preference is to avoid the fear of entering into an "adventure" that could complicate them. I maintain that even in situations that appear complex at first glance, it is certainly possible to find a solution.
The solutions and the opportunity – which insurance company will "pick up the gauntlet"?
I have plenty of examples, and one of them clearly reflects the approach that, in my humble opinion, should be adopted. Recently, our insurance agency took part in a complex and challenging project to build a new visitors' center for the Tower of David Museum in the heart of the Old City walls of Jerusalem.
The project leaders had great difficulty obtaining insurance in light of a series of engineering challenges, including: numerous demands from the Israel Antiquities Authority, concerns about the collapse of the ancient wall as a result of deep excavation adjacent to it, working at a bustling and crowded tourist site that continues to be active while the work is being carried out, and more.
We brainstormed with the planners and supervisors, studied the project (our office employs a full-time structural engineer), demanded verification of the basic assumptions regarding the existing or non-existent foundation for the Tower of David wall, and demanded engineering tests to analyze the soil beneath the wall.
Following the surprising findings, the planners were sent to update plans that aligned with the safe execution of the project - engineering and safety. We packaged everything into a survey that touched on the bare nerves of the venture and solutions to the risks we identified. With the help of excellent cooperation with an insurer that accompanied the process and took up the gauntlet in exchange for a premium and appropriate terms, we were able to put together a policy that allowed this national project, on a site that is one of the most important symbols of Jerusalem, to get underway.
In such a process, it is certainly possible to underwrite challenging projects, and what worked within the walls of Jerusalem can work anywhere else in the country, I am sure of that.
The insurance story of the Tower of David project in Jerusalem as a parable
Action lines for an insurance company with a vision
A crisis is also a door, and this is an appeal to the insurer to roll up the gauntlet. With rates already high, deductibles climbing significantly, and risk mitigation measures intensifying, a visionary insurance company that understands that it is possible to enter the vacuum created at the heart of change and make "lemonade out of lemons" will be able to grab a significant market share on terms and pricing that will yield it an adequate profit:
Proactive and influential underwriting - Proactive and influential underwriting can be promoted. This can be done, for example: By creating an outline for insurance coverage terms that correspond to the specific risks of the project and implementing a policy of responding to and dealing with difficulties (even when they seem "insurmountable"), automatic rejection should be replaced. Avoid using titles that pre-emptively rule out types of projects or types of occupation. Almost any project and field of occupation can benefit from insurance under compatible terms, without exposing the insurer to uncalculated risk.
A thorough examination of the nature of the work - understanding the plans, the execution method, the lining method and its adaptation to ground conditions, etc. As a result: identifying the risks and weak points, and examining the solutions proposed against them.
Examining the suitability of the performing contractor – selecting the performing contractor based on his past experience and ability, insurance history, work accidents, fines, regulatory sanctions, etc.
Examining the working environment conditions – crowding, Proximity to neighboring buildings, ensuring that a documentation report for adjacent buildings is obtained , proximity to buildings characterized by special populations (such as kindergartens, schools, etc.), and the like.
Determining appropriate risk mitigation measures - meeting appropriate and reasonable risk mitigation requirements. This is a very complex subject and will be explained with an example. We recently insured a project that includes excavation under part of an existing building. Coverage was approved only after the client agreed (contrary to his earlier plans) to evacuate the tenants from the start of the excavation until the completion of the parking lot. Of course, risk-appropriate accesses were determined in the event of damage to the existing building.
Proper pricing and accesses – pricing of self-participation amounts that correspond with all of the above and are derived from project data, the client, and the executing contractor. The insight that must permeate here is that entrepreneurs who enter into complex and unusual projects in their risks should keep some of the risk with them at the expense of entrepreneurial profit.
Fighting serial frivolous claims - fighting the depraved culture of filing frivolous claims that has developed here, which piles up difficulties for insurers who rush to "reduce" damages by reaching a compromise. "Injured" claims that have no substance have unfortunately become a kind of "national sport" in the construction industry. The insured and the insurance companies need to join hands in fending off fictitious proceedings and not fear the full conduct of a legal process. I will give you a recent example from our agency's activities. We recently accompanied a contractor in a lawsuit against an employee who claimed that he fell from a ladder at a construction site in Ramat Hasharon. The insured was certain of his rightness and decided to pursue the procedure to its conclusion. During the court hearings, it became clear that the employee's "case" was far from "closed." It was discovered that he presented several versions of how the accident occurred, and it was also determined that the contractor acted in accordance with safety regulations (for example, the worker received training as required, and the ladder was standard and in good working order). What was the result? The court dismissed the entire claim and the worker was even ordered to pay expenses. This example is just one of many. Experience shows that sometimes it is precisely the damages caused to contractors and insurance companies as a result of claims for "minor damages" (falling from a ladder, slipping on the site) that ultimately accumulate to a critical mass that causes long-term damage. If you will, what begins with a claim by a worker in Tel Aviv for a staged accident (or staged damage) and the management of a conciliatory claim - ultimately results in the withdrawal of overseas reinsurers from the construction insurance market in Israel.
A crisis is also a door, and this is an appeal to the insurer to roll up the gauntlet. With rates already high, deductibles climbing significantly, and risk mitigation measures intensifying, a visionary insurance company that understands that it is possible to enter the vacuum created at the heart of change and make "lemonade out of lemons" will be able to grab a significant market share on terms and pricing that will yield it an adequate profit:
Proactive and influential underwriting - Proactive and influential underwriting can be promoted. This can be done, for example: By creating an outline for insurance coverage terms that correspond to the specific risks of the project and implementing a policy of responding to and dealing with difficulties (even when they seem "insurmountable"), automatic rejection should be replaced. Avoid using titles that pre-emptively rule out types of projects or types of occupation. Almost any project and field of occupation can benefit from insurance under compatible terms, without exposing the insurer to uncalculated risk.
A thorough examination of the nature of the work - understanding the plans, the execution method, the lining method and its adaptation to ground conditions, etc. As a result: identifying the risks and weak points, and examining the solutions proposed against them.
Examining the suitability of the performing contractor – selecting the performing contractor based on his past experience and ability, insurance history, work accidents, fines, regulatory sanctions, etc.
Examining the working environment conditions – crowding, Proximity to neighboring buildings, ensuring that a documentation report for adjacent buildings is obtained , proximity to buildings characterized by special populations (such as kindergartens, schools, etc.), and the like.
Determining appropriate risk mitigation measures - meeting appropriate and reasonable risk mitigation requirements. This is a very complex subject and will be explained with an example. We recently insured a project that includes excavation under part of an existing building. Coverage was approved only after the client agreed (contrary to his earlier plans) to evacuate the tenants from the start of the excavation until the completion of the parking lot. Of course, risk-appropriate accesses were determined in the event of damage to the existing building.
Proper pricing and accesses – pricing of self-participation amounts that correspond with all of the above and are derived from project data, the client, and the executing contractor. The insight that must permeate here is that entrepreneurs who enter into complex and unusual projects in their risks should keep some of the risk with them at the expense of entrepreneurial profit.
Fighting serial frivolous claims - fighting the depraved culture of filing frivolous claims that has developed here, which piles up difficulties for insurers who rush to "reduce" damages by reaching a compromise. "Injured" claims that have no substance have unfortunately become a kind of "national sport" in the construction industry. The insured and the insurance companies need to join hands in fending off fictitious proceedings and not fear the full conduct of a legal process. I will give you a recent example from our agency's activities. We recently accompanied a contractor in a lawsuit against an employee who claimed that he fell from a ladder at a construction site in Ramat Hasharon. The insured was certain of his rightness and decided to pursue the procedure to its conclusion. During the court hearings, it became clear that the employee's "case" was far from "closed." It was discovered that he presented several versions of how the accident occurred, and it was also determined that the contractor acted in accordance with safety regulations (for example, the worker received training as required, and the ladder was standard and in good working order). What was the result? The court dismissed the entire claim and the worker was even ordered to pay expenses. This example is just one of many. Experience shows that sometimes it is precisely the damages caused to contractors and insurance companies as a result of claims for "minor damages" (falling from a ladder, slipping on the site) that ultimately accumulate to a critical mass that causes long-term damage. If you will, what begins with a claim by a worker in Tel Aviv for a staged accident (or staged damage) and the management of a conciliatory claim - ultimately results in the withdrawal of overseas reinsurers from the construction insurance market in Israel.
מסמכים
