Changes and updates in the construction insurance market in 2021, a look ahead to 2022
Aug 19, 2021
Over the past two years, numerous changes and updates have taken place in the construction insurance market in Israel. These changes have been influenced to a significant extent—perhaps primarily—by the conduct and decisions of overseas reinsurers (foreign insurance companies that provide reinsurance support to Israeli insurers). In the following brief review, we will highlight several key points regarding the changes and updates in 2021 and attempt to outline relevant trends for 2022.
Recent years have been marked by substantial losses for overseas reinsurers in the global contractors’ all-risk insurance market, including in Israel. While the “front” of losses in the global insurance market intensified during 2017–2018, 2019 proved to be a turning point. It was the year that signaled a shift in the global contractors’ insurance sector, prompting reinsurers to prepare plans for 2020 aimed at reducing losses and returning to profitability.
In the past two years, there have been many changes and updates in the construction insurance market in Israel. Changes that were influenced quite a bit, and perhaps mainly, by the conduct and decisions of reinsurers abroad (the overseas insurance companies that provide Israeli insurance companies with insurance support). In the following brief review, we will address some of the key points regarding the changes and updates in 2021, and attempt to draw relevant lines for 2022.
The last few years have been accompanied by heavy losses for reinsurers abroad, in the global construction insurance industry, including in Israel. While the sector "warmed up" in terms of losses in the global insurance market in 2017-2018, 2019 was the watershed year. It was a year that marked the spirit of change in the global construction insurance industry. Reinsurers abroad were required to prepare plans for 2020, in order to demonstrate loss reduction and a transition to profitability.
The uniqueness of the construction insurance market in Israel
According to data from the world's largest insurance broker (currently operating in approximately 130 countries), the sharp spike in the cost of contractors' insurance is a global phenomenon that has affected the Israeli market at particularly high rates compared to other markets. The effect on the Israeli construction insurance market stems from the existence of several unique characteristics.
First, the increase in work accidents on construction sites , including the increase in fatal work accidents. A phenomenon that also leads to the filing of claims for particularly high amounts and also leads to an increase in enforcement, which is reflected in frequent visits by inspectors to sites and the closure of construction sites.
Another important and prominent feature of the Israeli market is the activity of the National Insurance Institute , which is a unique player in the local insurance market. As is known, in Israel there is a unique mechanism that allows the National Insurance Institute to file subrogation claims against insurance companies for the amounts paid to the injured party. These subrogation claims oblige the insurance companies to pay another party as part of a liability to a third party, and as a result, increase the price of the insurance premium.
According to data from the world’s largest insurance broker (operating in approximately 130 countries), the sharp increase in contractors’ insurance costs is a global phenomenon, but the Israeli market has been affected to a significantly higher degree compared to other markets. The impact on Israel’s construction insurance sector stems from several unique characteristics.
First, there is the high incidence of workplace accidents on construction sites, including a notable number of fatal accidents. This phenomenon not only leads to claims in very high amounts but also results in increased enforcement, reflected in frequent inspections by regulators and site closures.
Another important and prominent characteristic of the Israeli market is the role of the National Insurance Institute (Bituach Leumi), which is a unique player in the local insurance sector. Israel has a distinctive mechanism allowing the National Insurance Institute to file subrogation claims against insurance companies for amounts paid to victims. These subrogation claims require insurers to pay an additional party under their third-party liability coverage, which, as a consequence, increases the insurance premium.
In the second half of 2019, leading reinsurers announced that they would not renew the special (facultative) agreements with Israeli insurance companies starting in January 2020. Indeed, for example, already in the last quarter of that year we saw how the insurance processes for large projects (with a value above the current contract) had become difficult, complex, and challenging.
In 2020, the change was felt in its full force . Reinsurer support was reduced to the property chapter only (Chapter A in a contractor's work policy), underwriting authority was limited/reduced to the value of the project, and there was a rejection by more and more reinsurers of participation in the third-party liability chapters and employers, etc. Similarly, large and leading reinsurers completely withdrew from the construction insurance market in Israel, in a move that caused a reduction in supply, an increase in demand, and as a result, a jump in prices.
Back in 2020, we saw a drastic increase in prices in current annual contracts with reinsurers, high pricing for the property section and higher pricing for the third-party section. Including especially high prices for requests to extend insurance with reinsurers. For example, our agency rescued a project in Holon that requested an extension of insurance for another year and the request involved a cost that was 3 times higher than the original insurance cost .
Overseas reinsurers respond to the Israeli market
The increase in reinsurance prices has led to a corresponding increase by Israeli insurance companies towards local policyholders. We see that contracting companies are having difficulty obtaining appropriate insurance, especially in risky projects such as building preservation, TAMA 38, urban renewal in dense environments, projects involving groundwater depletion, projects carried out in phases, and the like.
Additional aspects of tightening the terms of insurance coverage include, for example: separate requirements for third-party insurance and employers' liability for the use of cranes and hoists, a requirement that all contractors on the project be registered contractors, stricter conditions for maintaining the construction site, and more.
Israeli insurance companies are allowed to make decisions on their own up to a certain amount, and in the past year, reinsurers abroad have dramatically reduced the maximum amount that allows this. As a result, Israeli companies are required to apply for approval from reinsurers for many projects, and as a result, prices have increased, deductibles have increased, coverage has been reduced, exclusions/special conditions have been added, and more.
So what do we do?
It is important to understand the central thesis, which is that there is a growing involvement of insurance companies in changes to the safety culture in the construction industry in Israel . These are not slogans spoken out loud, but a business-commercial worldview. Contractors and entrepreneurs interested in insuring construction work should be aware of the tectonic changes and behave accordingly. For example – as we do in our office and recommend to our clients:
· Centralizing the entire insurance system with an insurance company to form a "power center."
· Fully insuring the project from day one (and not in stages) and reaching an agreement with the insurance company regarding the payment terms and insurance period.
· Conducting professional and tight negotiations on all the issues presented in the article, including coverage, underwriting conditions, protection conditions, insurance coverage conditions, limitations, exclusions, extensions, and more.
· Proper risk management, including avoiding filing small claims that could "dirty the case."
· Managing liability claims with a law firm accepted by the insurance company and, as far as possible, settling a claim before submitting it to the insurance company.
· Ongoing and comprehensive operational actions to improve the safety and claims situation.
It is important to understand the central thesis: there is an increasing involvement of insurance companies in shaping safety culture in the construction industry in Israel. These are not just slogans; they represent a genuine business and commercial mindset. Contractors and developers seeking contractor’s all-risk insurance need to be aware of these tectonic shifts and act accordingly. For example—as we practice in our office and recommend to our clients:
Consolidate the entire insurance portfolio with a single insurer to create a “center of power.”
Insure the project fully from day one (not in stages) and agree with the insurer on payment terms and the insurance period.
Conduct professional and thorough negotiations on all issues outlined, including coverage, underwriting terms, security requirements, insurance conditions, exclusions, limitations, extensions, and more.
Implement proper risk management, including avoiding filing minor claims that could “taint the file.”
Manage liability claims with a law firm approved by the insurer, and, where possible, resolve claims before submitting them to the insurance company.
Carry out ongoing operational measures to improve safety and reduce claims.
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