CII report concludes evergreen policies are future of construction insurance

Evergreen-insurance-policies-report

Authored by the Chartered Insurance Institute

How effective evergreen policies have proven to be in other markets strengthens the argument for introducing them into the construction market, according to a report published by the Chartered Insurance Institute.

The report examines the pros and cons of evergreen policies where the period runs in perpetuity until either of the notice parties (the insured or the insurer) gives 12 months’ notice to renegotiate or cancel the policy and explores the benefits for the construction market, which many insurance experts believe is beginning to harden.

According to the report, this type of policy would have the following benefits for insurers if introduced to the construction market:

More control - Rate and wording changes can be discussed at a time that suits insurers, once all loss details have been established, rather than being pigeonholed into a window prior to renewal of an annual policy.

Improved client relations - More time can be spent on servicing the clients instead of only making an appearance once a year to collect their premium. Insurers will be able to add a risk management proposition while simultaneously reducing the administrative costs associated with the annual renewal process. Exercises such as claims defensibility analysis can be carried out, whereby insurers review the types of claims the client receives and identifies what the business can do to specifically tackle these issues.

Hedge mechanism - By securing long-term income, insurers will gain some protection against any drops in market premium levels due to the market cycle.

Better retention rates - Shift of insurers’ approach from looking to win new business to servicing large accounts on long-term evergreen policies.

Challenges presented by this type of insurance policy for the construction market are listed as:

  • Reinsurance - Insurers do not know how much reinsurance to purchase as they do not know for how long they will hold the account. This could lead to insurers purchasing the wrong level, and either wasting capital or being left in a position where they are liable for more than they have adequately reserved.
  • Annual policy references - Current standard practice is to operate on an annual basis with annual policies and references created. It would take significant effort for the insurer to update their internal systems to accommodate these policies.
  • Authority of underwriters – Most insurers permit each of their underwriter’s certain levels of authority, which dictate policies they can or can’t write. Evergreen policies would force insurers to review this process and could cause lack of control from a Corporate Governance perspective.
  • Regulatory Under Solvency II, insurers will need enough capital to have 99.5 per cent confidence they could cope with the worst expected losses over a year. By writing an evergreen policy, insurers could potentially be causing themselves issues, as they are writing the same insured’s business for a sustained period of time.

Oliver Scott, author of the report, said: “The introduction of evergreen policies into the construction insurance market is a positive move, and is one which allows benefits to be felt by all involved. Evergreen policies are the future of construction insurance.

“The biggest benefit will be felt by the clients, as they will be on the receiving end of the increased attention and servicing that insurers and insurance brokers can now afford to provide. In a world where the client comes first and service levels are paramount, this surely must be a good thing.”

Matthew Connell, Director of Policy and Public Affairs of the Chartered Insurance Institute, said: “In order to increase trust in our united profession, it is vitally important to consider unmet needs and how to address them.

“This is a thought-provoking report, which clearly details the pros and cons for the profession of taking action to introduce evergreen policies to the construction market.”

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About CII

The Chartered Insurance Institute (CII), the leading professional body for the global financial services profession, exists to promote higher standards of integrity, technical competence and business capability.

With over 115,000 members in more than 150 countries, the CII is the world's largest professional body dedicated to insurance and financial services.

Our membership covers all disciplines within the insurance industry (claims, broking, underwriting), those working in the life and pensions sector, the mortgage advice market and financial advisers (under the Personal Finance Society brand).

Our Royal Charter requires us "to secure and justify the confidence of the public" in our members and in the insurance and financial services sector.

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