Expected changes in the insurance market for 2019
Feb 28, 2019
By: Itzik Simon
The year 2019 has just begun. It is an excellent time to highlight an important trend—Israeli and global alike—concerning the construction insurance sector, specifically the dramatic changes expected in the field (tracing back to their sources).
As an insurance agency focused on construction insurance, which regularly conducts market analyses and in-depth research, it is important for us to shed light on a significant issue that is unfolding before our eyes.
The Changing Relationship Between Israeli Insurance Companies and Overseas Reinsurers
As is well known, insurance companies in Israel rely on overseas insurers, who act as reinsurers for policies marketed domestically. While the perspective of these reinsurers is global, covering construction sectors in markets around the world, the construction insurance market in Israel has unique characteristics. These characteristics have caused it to be underpriced for years, due to various reasons such as:
Competitive market – The construction insurance sector in Israel operates in a competitive market and faces pressure from clients and policyholders, creating a price-reduction effect. This is compounded by competition both among insurance companies and among insurance agencies.
Risks unique to the Israeli construction sector – In addition to risks common to construction sectors worldwide, Israeli construction faces unique risks, such as security challenges, widespread employment of unskilled or unauthorized workers, lack of oversight on safety officers, and complex urban renewal projects necessitated by housing shortages in a small, densely populated country.
A legal system imposing extensive liability on contractors – The Israeli legal system imposes broad responsibilities on contractors and planners, and, consequently, on the insurance companies backing them. Claims that might have been dismissed in other legal systems often become binding judgments in Israel, carrying exceptionally high compensation, particularly regarding bodily injury claims and far-reaching rulings on lost years of work (even for the most basic laborers).
To these factors must be added “shocks” that have caused significant financial damage to overseas insurers, such as natural disaster claims. As is well known, the principle of “risk spreading” is a fundamental tenet of insurance; thus, large-scale damages abroad (e.g., earthquakes, hurricanes) have a direct “butterfly effect” on pricing levels in other regions, including Israel.
Of course, these phenomena are not unique to the construction sector; they have also been observed in other lines of insurance, including vehicle insurance and long-term care insurance. Situations in which financial losses to overseas reinsurers, caused by natural disasters and compounded by “disputes” with insurance companies in Israel, have led to increased prices.
Tightening conditions for Israeli insurance companies
The chain reaction has left Israeli insurance companies facing a difficult situation, to say the least. On the one hand, they are dealing with large risks, broad exposure, and competition in a small and demanding market, and on the other, they are required to raise prices and toughen their positions.
A prominent example is insurance for contractor work for TAMA 38 projects in the framework of reinforcement and renovation (TAMA 38/1). Projects unique to the Israeli construction industry, which suffers from a shortage of residential land, require high costs and complex insurance conditions.
To this must be added the construction accidents in Israel, which are considered a "real national disaster." Not only have they become one of the greatest dangers to workers in the economy, but it turns out that Israel ranks among the highest in the world in terms of work accidents. An official report recently published by the OECD indicates that only Portugal and Cyprus "overtake" Israel in terms of the rate of work accidents per 100,000 employers.
Furthermore, the Israeli legal system tends to be stricter with the contractor and insurance companies (based on the "deep pocket" theory), and to make it easier for those injured on construction sites, both for the purpose of protecting vulnerable populations and from a "responsible" approach to market education and warning.
From this it is seemingly easy to understand why global insurance companies are slowly seeking to "step down" from the coverage provided for the chapters concerning third parties and employers' liability, and remain only with insurance coverage for the property chapter. As is known, the other chapters in insurance - third parties and employers' liability - create long-term exposure for them, in light of the long tail that surrounds them.
Additional specific challenges
How are Israeli companies responding? The first reaction was "shock and awe," followed by a recovery that was expressed in a counter-reaction towards policyholders. Price increases, changes in terms, increased independent participations, and even screening of insurance and projects (for example, a tendency not to insure projects intended for the preservation of buildings). All of these, together and separately, present the policyholder with uncertainty.
From the perspective of the regular customer, the regular insured, he must understand the implications of these processes. As an insurance agency knowledgeable in the field, which deals with construction insurance and specializes in this subject, we expect that in 2019 we will continue to see a significant increase in prices across the entire policy market. Both in insurance for contractor work and in liability insurance such as product liability and professional liability. It is also possible that the insured will encounter a challenge in obtaining insurance coverage in large volumes, including even for a proper payment.
The impact on the insured in Israel
Additional challenges – large-scale projects in the pipeline
Just before concluding, it is impossible not to mention another point, which is the unprecedented growth in Israel in terms of infrastructure projects. We are already talking about dozens of mega-projects in the government sector that are estimated to be worth more than two billion shekels.
In this regard, we include, for example, the light rail in the center, the Tel Aviv subway, expected expansions on the Israel Railways tracks, expected expansions on Highway 6, and more.
Israeli insurance companies will be required to take on risks in providing coverage for these projects, and increase their dependence on international reinsurers. They will have to invest enormous resources in creating relationships and collaborations with international agents, consultants and brokers, and intelligently locate reinsurers with appropriate financial capabilities and credit ratings. Their expenses will be placed, among other things, at the door of the insured in the various projects, and not just in infrastructure projects, of course.
Just before concluding, it is impossible not to mention another point, which is the unprecedented growth in Israel in terms of infrastructure projects. We are already talking about dozens of mega-projects in the government sector that are estimated to be worth more than two billion shekels. This includes, for example, the light rail in the center, the Tel Aviv subway, expected expansions of the Israel Railways tracks, expected expansions of Highway 6, and more. Israeli insurance companies will be required to take on risks in providing coverage for these projects, and increase their dependence on international reinsurers. They will have to invest enormous resources in creating connections and collaborations with international agents, consultants, and brokers, and intelligently locate reinsurers with appropriate financial capabilities and credit ratings. Their expenses will, among other things, be passed on to the insured in the various projects, and not just in infrastructure projects, of course.
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