Global Construction Infrastructure Market Update - 2016 Q2

Risk. Reinsurance. Human Resources.

Construction & Infrastructure Market UpdateAon Construction and Infrastructure Group

Aon Risk Solutions

2nd Quarter 2016

Executive Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1

Asia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3

Australia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4

Canada . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8

EMEA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .12

Latin America . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .14

United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .17

Contacts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .22

Table of Contents

Aon Risk Solutions 1

Executive summary

Over the past several years, we have continued to see a softening insurance market with a few exceptions in particularly challenging geographies and risk classes. This phenomenon cannot be attributed to any single factor but is the result of a confluence of several factors working together.

Insurance carriers are under tremendous pressures to identify sources of growth. Coupled with a prolonged period of anemic economic growth, a paltry interest rate environment, and an ever increasing amount of risk capital competing to be put to work, rate compression was an inevitable result of a shifting balance between supply and demand. Aon Benfield’s June 2016 Reinsurance Market Outlook estimates that reinsurance capital is currently at peak levels, up 4 percent over the prior year through June. The largest driver of this trend has been alternative capital, principally the additional deployment of collateralized reinsurance structures. In an effort to combat profitability pressures and realize greater efficiencies of scale and cost synergies, many carriers have stepped up their merger and acquisition activity with a focus on larger targets. In 2015, the insurance industry saw a record level of $5 trillion in deal volume, up 37 percent from 2014.

This begs the questions, when will we see the bottom of this cycle and how will that bottom be defined?

Unlike some past cycles, we do not believe a reversion in this trend will be driven by a catastrophic event.Instead, we believe this cycle turn will be a slow and deliberate process. After multiple years of adverse loss development in segments of their book, several of the largest insurance carriers are re-evaluating the risks they have underwritten, often resulting in a significant reduction in participation or an exit altogether. These actions have caused ripples across the industry due to their large participation in these market segments. It is worth noting that we have seen a slowing in claims payments, which could also be a symptom of challenged carrier profitability.

Outside of the insurance market, we are faced with several large uncertainties looming on the horizon. To name a few: it is still too early to fully understand the repercussions of the Brexit movement; the outcome of the U.S. presidential election will result in very different visions for the direction of the country going forward; despite their best efforts, central banks around the world have not been able to generate the level of growth they were targeting with eased monetary policies; pockets of political unrest continue to erupt around the world.

Aon’s unparalleled insight into accessing risk capital allows us to implement truly innovative solutions. We pride ourselves on helping our clients make risk management a competitive advantage, no matter what markets they operate in. We are happy to share Aon’s 2nd Quarter 2016 Global Market Update as a high-level overview of these trends in the global market.

2 Aon Construction Market Report | Q2 2016

Dedicated Construction and Infrastructure Specialists

Global capabilities

Aon Risk Solutions has the largest dedicated network of construction and infrastructure risk advisors and

brokers in the world. Our Construction and Infrastructure Group specializes in all facets of construction-

related risk management for construction contractors, engineers, project owners, developers, financiers,

and consultants.

APAC70

680in NorthAmerica

Americas700

EMEA220

70in U.K.

550in U.S.

20 in South America

150in Europe

30in Australia


Asia

Property | CAR, EAR

While capital project investment has remained active throughout Asia in 2016, the region has seen a deceleration in the number of projects to reach financial close. As a result of the narrowed pipeline, Asian market capacity for construction risks is abundant and pricing has become increasingly aggressive as insurers compete for market share.

The majority of active projects in the region continue to be

contractor-controlled. The absence of Delay in Start-up coverage,

coupled with contractors’ willingness to accept standard market

forms, rather than bespoke policies, allows clients to benefit

from the prevailing soft markets conditions in both domestic

and regional markets. Nonetheless, even the more complex

project-financed and owner-controlled projects that require

bespoke policies are also enjoying similar benefits of a competitive

marketplace, albeit to a lesser degree. Regional insurers continue to

be the driver for setting terms in the Asian market.

CategoryQ2 2016 Direction Commentary

2016 Outlook Commentary

Pricing/Rates � Rate Change: -5% to -10% Clients continue to benefit from soft market conditions and the abundance capacity both domestically and regionally. However, power plants utilizing “unproven” technology are scrutinized closely.

� Expected Rate Change: -1% to -5% As insurers look to meet aggressive growth goals we expect competition to remain high.

Limits �� No material change. �� No material change.

Deductibles/Retentions �� Most insurers maintained deductibles;

however, there were some rate and deductible reductions for gas turbines as insurers became more familiar with unproven units.

�� No material change is expected.

Coverage �� No material change; broad coverage is obtainable. �� No material change is expected; competition among

insurers remains strong.

Capacity/Appetite � Asia has continued to see markets entering

the construction sector, particularly Lloyd’s markets, which already have a presence in the region.

� We expect further external pressure from markets that are not currently represented in Asia as they look to the region for growth opportunities.

Losses �� No material change; sector remained healthy overall. Contractor-controlled projects, which typically do not have significant or complex losses, continued to experience smaller attritional losses.



Australia

Property | CAR, EAR

There remains an abundance of capacity in the Australian property market, but we began to see a subtle shift during the first half of 2016 as some insurers reached an inflection point and walked away from risks they believed were unsustainable at the market pricing and terms. While this did not translate into pricing increases, in many cases it did require clients to leverage insurer relationships and consider alternative pricing structures. Coverage enhancements, such as Increased Cost of Working (ICOW), Extra Expense, and Idle Standby Costs are readily available for all major project and annual practice policies.



Pricing/Rates �� Rate Change: No material change. Minor reductions were still available, but some insurers began to walk away from risks they viewed as unsustainable at current pricing and terms.

�� Expected Rate Change: No material change is expected.

The opportunity for significant rate reductions will be limited. We expect more insurers to take a rollover position and some insurers to start pushing for rate increases.

Limits �� Insurers continue to offer higher than required limits; however, most clients chose to maintain their limits.

�� No material change is expected. While we expect insurers will continue offering increased limits, we do not foresee a catalyst for clients to materially change their program limits at this time.

Deductibles/Retentions �� Given the soft market conditions, there were

no material benefits for clients to take higher retentions.


Coverage � Insurers continue to offer coverage enhancements, including Idle Standby Costs and ICOW.

� This trend is expected to continue.

Capacity/Appetite �� While there continues to be an abundance

of capacity, some insurers became more restrictive in deploying their capacity on risks they believe are unsustainable at current pricing and terms.

�� No material change is expected. We expect insurers to become more selective; however, new insurer entrants will likely take up any slack in capacity.

Losses � In the first half of 2016, there was an increase in construction claims, particularly for projects in Northern Australia. There were also a number of storm events that impacted the market.



Liability | Primary Casualty

In a continuation of the trend seen in 2015, the casualty market

for construction risks remained extremely competitive. With an

abundance of capacity, we continue to see the characteristics of a

soft market. Worker-to-worker losses will continue to be a hot topic

through the rest of 2016 and into 2017. Clients with a history of

worker-to-worker claims will be closely scrutinized.



Pricing/Rates �� Rate Change: No material change; however, large rate reductions were less available as pricing is reaching minimum levels. Clients that marketed their program were able to achieve minor rate reductions.


Limits � With an increase in market capacity, higher limits are easily attainable and competitively priced.


Deductibles/Retentions �� Given the soft market conditions, there were

no material benefits for clients to take higher retentions.


Coverage � There were a number of insurers willing to include innovative coverages within the liability policy to differentiate themselves from competitors. Extensions for Environmental Liability and Professional Indemnity were available in certain circumstances.


Capacity/Appetite � There continued to be an oversupply of

capacity in the market. �� No material change is expected.

Losses �� No material change. �� No material change is expected.

Australia


Liability | Excess Casualty

In a continuation of the trend seen throughout 2015, the excess

casualty market’s capacity remains at an all-time high, leaving

little room for further rate compression.



Pricing/Rates �� Rate Change: No material change; excess casualty premiums are at minimum treaty levels.


Limits � With an increase in market capacity, higher limits are easily attainable and competitively priced.


Deductibles/Retentions �� No material change. �� No material change is expected.

Coverage �� No material change as excess capacity is pure follow-form. �� No material change is expected.


capacity in the market. � This trend is expected to continue.


Australia


Liability | Professional

The professional liability market for construction risks remains

stable and competitive. In an effort to gain a competitive

advantage, insurers have become more innovative. For example,

insurers have begun to explore offering project-specific policies

with a term longer than 10 years; we recently placed a 14-year

policy for a client. The continuing challenge is matching the

evolving contractual conditions with the available cover. New

covers have been increasingly explored by insurers, such as “Fit

for Purpose” cover. Pricing discounts are available when multiple

insurers are engaged.



Pricing/Rates � Rate Change

Primary: -5% to -10%, for clients with well managed risks.

Excess: -10% to -20% due to new excess capacity entering the market.


Limits �� No material change. � Clients will likely take advantage of soft market conditions and purchase higher limits, as appropriate.


Coverage � In order to comply with ever-expanding contractual conditions, we expect insurers to explore new coverage options, including “Fit for Purpose” cover.



capacity in the market. � This trend is expected to continue.


Australia


Canada

Property | Builders Risk, CAR, EAR Participation in large and complex projects has been strong from both local and international contractors. The Canadian market and work sites are well regulated; for these reasons, Canada is an attractive business environment for overseas companies, including insurers. This contributes to a more competitive market, particularly with respect to CAR, EAR, and Builders Risk coverages. Underwriters have been given mandates to grow and are competing for this business. Insurers continue to pay close attention to projects located in natural catastrophe zones as well as potential water damage exposure. Underwriters are also beginning to question rate adequacy and reference underperforming lines of coverage.

The mid-market is also stable as terms have remained largely unchanged. However, it is still possible to obtain minor rate reductions on high-quality contractors with good track records.

In both the large and mid-market, projects that present a challenge, e.g. frame, and contractors that are considered a challenging class of business, e.g. hot roofing, reductions are not possible and terms are relatively stringent.



Pricing/Rates �� Rate ChangeLarge Market: No material change.Mid-Market: No material change.

�� Expected Rate Change: No material change is expected; however, as we get closer to year-end and companies’ targets have not been met, competition may force markets to be less price-conscious than in earlier quarters.

Limits �� Large Market: No material change; the majority of clients continue to purchase limits according to the projects Total Insured Value and Probable Maximum Loss, factoring in natural catastrophe exposure. Mid-Market: No material change.


Deductibles/Retentions �� Large Market: No material change; specific peril

deductible levels, e.g. natural catastrophe, are set by project type and location. Water damage exposure started to garner higher deductibles. Mid-Market: No material change.


Coverage �� Large Market: No material change; forms are almost exclusively manuscript.

Delay in start-up, soft-costs, and consequential covers provided by Defect Exclusion (DE) / London Engineering Group (LEG) language continue to garner attention.

Underwriters continue to monitor natural disaster and catastrophe exposures and began to pay closer attention to extensions of cover and the sub-limits provided thereon.

Mid-Market: Due the highly competitive market, mid-market placements are increasingly written on manuscript forms, which allows for broader cover than the general marketplace.


Natural catastrophe and water damage exposure will continue to be a focus for underwriters.

We may see a reduction in broadness of cover and sub-limit provided for certain extensions of cover.

Capacity/Appetite �� Large Market: No material change; mega-projects

are attracting capacity with careful consideration for natural catastrophe exposures. Terms must be adequate for the exposure.

Mid-Market: No material change; the market for frame projects began to expand due to new insurer entrants. While this increased capacity, we did not see a material change in rates, which would suggest we are at or near the low end of the cycle.


Losses � While losses have arisen from forest fires and similar events in Canada, the effects on the construction insurance market are expected to be minimal.

There were also large CAR losses that have not fully materialized; however, certain projects, e.g. frame, are beginning to be priced close to technical terms.

�� No material change is expected.Following a large frame loss of $25m CAD in Alberta, insurers could start to restrict and impose stricter terms for these types of projects.



The Canadian market and worksites are well-regulated and does

not have some of the same challenges as the U.S. Therefore,

Canada is an attractive business environment for overseas insurers,

particularly with regard to wrap-up coverage. This has resulted in

a competitive market. Underwriters have been given mandates to

grow but the majority of which continue to struggle to compete

with the Lloyd’s insurers; however, some local underwriters have

had success in doing so.



Pricing/Rates �� Rate Change Large Market: No material change; wrap-up coverage continues to be aggressively priced, particularly from the London insurers with domestic markets attempting to following their lead.Mid-Market: No material change; due to the highly competitive market, when a risk with good loss experience falls within an underwriter’s appetite, we are able to negotiate modest rate reductions.

�� Expected Rate Change: No material change is expected; however, as we get closer to year-end and companies’ growth targets have not been met, competition may force markets to be less price-conscious than in earlier quarters.

Limits �� No material change. �� No material change is expected.


Coverage �� No material change; coverage remains broad with no restrictions. �� No material change is expected.

Capacity/Appetite �� No material change. �� No material change is expected.


Canada


Liability | Excess Casualty

There has been an increased appetite for Canadian umbrella and

excess risk, accompanied by rate compression. Fixed premium-

per-million on excess placements can still be negotiated.

Depending on the risk, there are certain thresholds (minimum

premium-per-million) below which underwriters will not reduce

their pricing.



Pricing/Rates �� Rate Change: No material change. Excess capacity is available at historically low rates. London insurers are leading the market in pricing as they continue to demonstrate their appetite and capacity for construction risks.




Coverage �� No material change. �� No material change is expected.

Capacity/Appetite �� No material change. �� No material change is expected.


Canada



Competitive pricing and generally broad coverage continues

to be available on annual practice programs with the

exception of Zurich placements, where internal pressures

have impacted its ability to keep pace on pricing for certain

risk profiles. Despite the Canadian government’s large

financial commitment to infrastructure spending, the market

has decelerated relative to the need for project-specific

placements compared to 2015, which was a blockbuster

year for project-specific activity. Coupled with a lengthy

and involved underwriting process, new entrant insurers

seeking to strengthen their position have not been able to

demonstrate their capabilities. In addition, continued M&A

activity among engineering firms further compressed premium

in the marketplace due to the combined entity’s greater

market leverage and standard automatic acquisition clauses.

With respect to particular regions, clients operating in Western

Canada, particularly Alberta, continue to be impacted by the

weaker economic environment. These clients are trying to

soften the blow by exploring cost cutting options, including

the cost of their professional insurance. This has resulted in the

increased marketing of programs. While we continue to see a

significant number of smaller regional firms ceasing operations

altogether, the rate at which this is occurring has slowed.



Pricing/Rates � Rate Change: No material change. In general, clients with moderate growth and a favorable loss experience were able to achieve a rate reduction. However, insurers were reluctant to offer significant savings where premium levels have decreased.

�� Expected Rate Change: No material change is expected. Economic challenges for Western-focused clients have resulted in the increased marketing of risks.

Limits �� No material change, barring a material change in a contractor’s business. �� No material change is expected, except where

compelled by contract.

Deductibles/Retentions �� No material change. Retentions have largely

remained constant as the benefit of assuming more risk is negligible for most clients. However, clients based in the Prairies are exploring alternate deductible and retention structures in an effort to reduce their premium spend in a challenging economic environment


Coverage �� Coverage broadened as a result of expanding client contractual requirements, pressure from brokers, and increased insurer competition.


Capacity/Appetite �� The U.S.-led insurer entrants into the Canadian

market continued to struggle to find their niche, suffering from high pricing models and restrictive coverage. London insurers are taking small steps to increase their visibility in the Canadian market.

London insurers continue to provide solutions and innovations for proven and preferred clients on annual placements. The over-reliance on one or two key insurers for project-specific placements has resulted in fatigue. Slight changes in service and responsiveness may be signaling a change in overall approach.


Losses �� No material change as loss activity remains stable. Public-Private Partnerships continue to have a better loss experience than other delivery models.


Canada


EMEA

Property | CAR, EAR

The market continues to be highly-competitive with no sign of change on the horizon. Soft market conditions have prevailed for an extended period and are fuelled by the excessive levels of capacity in the system. Aggressive underwriting from new entrants continues to put pressure on more established insurers as they compete to maintain market share.



Pricing/Rates �� Rate Change: No material change.Smaller pool of construction premium continues to drive competition.

� Expected Rate Change: 0% to -5%.Flat to moderate rate reductions are expected throughout the balance of the year.

Limits �� No material change.Construction projects continued to benefit from limits that reflect the full contract value. Inner sub-limits for certain policy extensions remain high.


Deductibles/Retentions �� Deductible levels have stabilized but remain at

historical lows. �� No material change is expected.

Coverage � In general, coverage continued to broaden as insurers sought to maintain share and differentiate their offering.

�� No material change is expected.Clients continue to be well-positioned to push for broader coverage.

Capacity/Appetite � Market capacity remains at record high levels

and new market entrants are constantly creating activity.


Losses �� No material change. Moderate attritional losses continued, but no major losses threaten to impact market conditions.




The professional market is split into three sectors in EMEA:

United Kingdom and Ireland, Continental Europe, and

Middle East and North Africa. The trends for all regions are

predominately the same, with small- and medium-sized firms

benefitting from rate compression. Rates for large firms are flat or

are increasing where significant claims have been experienced.

While insurer mergers have reduced capacity to a degree, this

has been more than offset by new insurer entrants, which is

expected to continue through the rest of the year and into 2017.

The top-tier London brokers have shown a broader utilization of

programs and facilities for small to mid-market business.



Pricing/Rates � Rate Change: -1% to -5%Generally, rates have decreased in absence of significant claims experience.

� Expected Rate Change: -1% to -5%New insurer entrants should maintain the continued downward pressure on rates.

Limits �� Owners and contractors are seeking higher indemnity limits on large projects. �� Compression in the “food-chain” with funders are

driving indemnity limit requirements and usurping Owners’/Employers’ requirements.

Deductibles/Retentions �� Retentions have largely remained constant

as the benefit of assuming more risk is negligible for most clients.

�� Insurers are analyzing the effect of claims inflation on deductible/retention levels.

Coverage �� Coverage is extremely broad. �� No material change is expected, other than Insured vs. Insured clauses, which are being scrutinized by insurers.

Capacity/Appetite �� There is a surplus of primary capacity,

particularly for smaller firms, and an abundance of capacity from excess of loss insurers for all risks.

�� New insurers are expected to enter the market.

Losses �� Claims have increased along with the growing size and complexity of projects. �� No material change is expected.

EMEA


Latin America

Property | Builders Risk, CAR, EAR

Following a difficult year for construction and infrastructure projects in the Latin America, economic weakness persisted through the first half of 2016. Continued depressed oil and commodity prices have had a significant adverse impact on most country currencies and construction projects in the region. Countries that have been particularly hit hard are Brazil, Ecuador, Uruguay, and Venezuela. In addition to economic challenges, several countries also have challenging political situations they are working through such as the presidential election in Peru and corruption scandals in Brazil. These scenarios led to an increased level of uncertainty for the countries and region, which can impede the initiation of longer term infrastructure projects. While construction activity in the region has slowed, risk capital from both local and international insurers is widely available at competitive rates and terms.



Pricing/Rates � Rate Change: -1% to -5%Lower anticipated investment in infrastructure projects has increased competition among insurers for a fewer number of projects.

� Expected Rate Change: -1% to -5%Moderate rate reductions are expected throughout 2016.


Deductibles/Retentions � While some insurers previously set retentions as a

percentage of loss with a minimum value, there has been a growing trend to apply a flat rate.


Coverage � LEG 3 cover is becoming more commonplace for certain types of construction. � This trend is expected to continue.

Capacity/Appetite � There is an abundance of capacity in the Latin

American market due to new insurer entrants and foreign capacity being deployed on LatAm risks where there is a foreign contractor performing the work, e.g. Chinese capacity deployed on a Colombian infrastructure project being led by a Chinese contractor. In addition to China, other countries with a significant presence in LatAm include Spain and Italy.


Losses �� No material change.While not significant enough to impact the market, there were unexpected losses in wind farms related to windstorms that had not previously experienced with this type of construction.




Latin American countries are not considered litigious. Thus,

limits for casualty insurance are moderate compared to other

geographies. The largest and most complex projects are analyzed

on a case-by-case basis. International lenders are also monitoring

the liability exposures and policies, which may translate to

higher limits of liability in the future. Given the compressed rate

environment, we believe there is room for higher casualty limits

on future projects.



Pricing/Rates � Rate Change: -5% to -10%The number of new projects is shrinking, leading to market competition and rate reduction.

� Expected Rate Change: -5% to -10%This trend is expected to continue

Limits � Given the soft market conditions, clients are increasingly considering purchasing higher limits.




Capacity/Appetite � Available capacity expanded due to new

entrants at local and regional levels. � This trend is expected to continue.




Pricing/Rates � Rate Change: -1% to -5% � Expected Rate Change: -1% to -5%New insurer entrants should result in further rate compression.

Limits � Owners, employers, and lenders are all seeking higher indemnity limits on large projects.



Coverage �� Coverage is already very broad. �� No material change is expected.

Capacity/Appetite � Capacity was abundant as new insurer

entrants continued to add capacity to the market.


Losses � Claims have increased along with the growing size and complexity of projects. �� No material change is expected.


Latin America




Pricing/Rates � Rate Change: No material change. � Expected Rate Change: -1% to -5%Rates are expected to decline due to increased capacity in the market.

Limits � No material change. � Aggregate limits available from insurers may increase due to a reduction in the number of infrastructure projects in the region.

Deductibles/Retentions

N/A N/A


Capacity/Appetite �� No material change. �� No material change is expected, except for a slight

reduction in available capacity for Brazil. Some insurers and reinsurers may reduce their appetite for Brazil construction risks due to the recent country credit rating downgrade and contractor-specific challenges related to corruption allegations.

Losses �� No material change. � An increase in losses is expected due to the slowdown in the Latin American economy.

Performance Security

Latin America


United States

Liability | Primary & Excess Casualty

The U.S. market for construction remains competitive, but we continue to see a number of major insurers realizing profitability challenges in segments of their portfolios. The most notable are the larger insurers with significant legacy portfolios dating back 10 to 15 years. Newer insurer entrants are driving competitive pricing for clients with strong business practices and favorable loss profiles. Several sectors of the market, most notably New York liability, have continued to be a challenging environment due to increasingly selective appetites of insurers for best-in-class risks, which has required the evaluation of alternative program structures, such as fronted programs or project specific Owner/GC coverage, e.g. Labor Guard.



Pricing/Rates �� Rate Change: Primary: -1% to -5% due to insurer competition.Excess: -5% to -10% due to an abundance of capacity.Excess rates are falling faster than primary liability rates, particularly in upper layer excess.Excess underwriters are insisting on higher attachments, if losses warrant. “Frequency of Severity” is becoming an often used phrase.New York Labor Law has created a unique market condition where primary and casualty insurance policies have ceased being insurance and have become loss financing arrangements.

� Expected Rate Change: Primary: -1% to -5% due to insurer competition.Excess: -1% to -5% with greater reductions possible in upper layers. Data indicates a continued return to favorable market conditions with rate compression. The Residential Excess and Surplus Lines marketplace is softening, but admitted insurers continue to avoid this segment.

Limits �� Clients are maintaining limits purchased. �� The majority of clients are expected to maintain their excess casualty limits.

Deductibles/Retentions �� Most clients have maintained their

deductible/retention levels as insurers have remained firm on retention levels.

�� Most clients are expected to maintain their deductible levels; however, clients with poor loss experience or low deductibles relative to the exposure continue to feel pressure from insurers to increase retentions. Lead umbrella insurers are also exerting pressure on the attachment point for clients with significant fleets or with poor loss experience.

Coverage �� Coverage and program design enhancements were available. �� We expect reasonable coverage and program design

enhancements to be available as insurers put a greater emphasis on managing their risk aggregation on a potential single loss scenario.

Capacity/Appetite �� Excess casualty capacity remains at

record levels. �� This trend is expected to continue. Capacity for lead excess layers is expected to increase.

Losses �� No material change. �� No material change is expected.Many insurers are experiencing deterioration in their Auto Liability underwriting results, which may push rates higher in the future.



The professional liability market for construction risks remains

stable and competitive for both annual practice and project-

specific policies. It was originally speculated that the XL/

Catlin merger would reduce the amount of competition in the

marketplace. This has yet to transpire, and in fact, capacity is at

an all-time high. An unprecedented number of new insurers

and programs have launched in the first half of 2016, resulting in

capacity growth outpacing demand growth. The market surplus

is expected to yield some of the softest market conditions in

recent history. The resulting overabundance of capacity is good

for buyers; however, insurers are facing a fundamentally difficult

landscape due to a pronounced and increasing frequency of

large claims coupled with strong competition, hampering their

attempts to lift pricing in response to higher claims costs.

Alternative project delivery methods and the contractual

requirements that arise from these projects continue to be a

challenge in the marketplace. The U.S. lags behind other regions

in the adoption of these delivery methods, e.g. P3, IPD, and

similar. As a result, insurers have been reactive in the amendment

of policy terms and conditions to accommodate contractual

provisions. For example, on P3 projects, there remains concern

over the “insured vs. insured” and “related entities”’ exclusions,

and how they impact the availability of coverage to a Design-

Build joint venture team. This includes both the contractor and

design professionals. Furthermore, P3 projects can also be

challenging, depending on the project’s type, scope, and term.



Pricing/Rates �� Rate changePrimary: +1% to +5% due to increased claims activity.Excess: -1% to -5% due to an abundance of capacity.

� Expected rate change: -1% to -5%

Pricing is expected to further soften as capacity is at an all-time high. Competition will result in favorable rates for many Insureds.

Limits �� Clients are maintaining limits purchased. � Many clients are considering increasing their limits due to capacity available at attractive terms.

Deductibles/Retentions �� Most clients have maintained their

deductible/retention levels. �� No material change is expected.

Coverage �� No material change. �� Competition has caused insurers to explore coverage enhancements in order to differentiate their offerings and not compete exclusively on price.

Capacity/Appetite � Excess professional liability insurers offered

an abundance of capacity, often in excess of $250 million.

� Due to the entry of several new professional liability insurers in the U.S. and London markets, capacity is expected to increase further for primary layers.

Losses �� Claims activity was fairly constant but claims severity increased. �� This trend is expected to continue.

United States


Property



Pricing/Rates � Rate Change: -1% to -5% Larger and more complex client risks experienced a rate decrease for the quarter

� Expected Rate Change: -5% to -10% We expect high single- to double-digit rate decreases driven by oversupply, significant sign-downs, and a lack of catastrophic loss activity.

Limits �� Nearly 95% of risks purchased the same or higher limits. �� The abundance of supply coupled with the downward

pressure on price could make higher limits more attainable.

Deductibles/Retentions �� Over 90% of risks purchased the same or

lower deductible/retention levels. �� No material change is expected.

Coverage �� No material changes in property coverage were seen as broad property coverage is readily available in the market.

�� No material change is expected. Flood and contingent business interruption continue to be carefully underwritten by most insurers.

Capacity/Appetite �� Most insurers offered similar line sizes. �� Capacity is expected to be more than adequate to meet

buyer demand.


United States


Property | Builders Risk



Pricing/Rates �� Rate Change: -1% to -5% Clients largely saw flat to declining rates due to high levels of capacity and competition among insurers; however, frame building contractors have continued to experience a hard market due to recent losses.

�� Expected Rate Change: -1% to -5% National contractors with non-catastrophic exposures are expected to continue to see flat and declining rates in the absence of a large catastrophic event that would decrease available capacity.


Deductibles/Retentions �� Most insurers have been able to maintain

deductibles, although we have seen increased deductibles and retentions for prototypical equipment and testing.

�� This trend is expected to continue with increased capacity driving insurers to maintain deductibles. In areas highly susceptible to catastrophic events, deductibles are remaining constant with percentage of value at risk at time of loss being the main driver.

Coverage �� The market remained soft with broad coverage grants achievable as insurers felt pressure to retain business.

�� Increasing competition in a soft market will maintain pressure on insurers to hold broad coverage terms, while preserving flat rates.

Capacity/Appetite �� With all risk placements, we have seen

increased capacity in the market estimated at $3.5 billion USD. Catastrophic-related capacity in high aggregation zones such as Miami/Houston wind and California quake is beginning to strain due to increased volume of construction.

�� Capacity will remain flat or slightly up for non-catastrophic risks, while aggregation will continue to be an issue in high risk areas as the market has approximately $1.5 billion USD in catastrophic capacity and construction continues to grow.


United States


Performance Security | Subcontractor Default Insurance

The Subcontractor Default Insurance (SDI) marketplace

continues to deteriorate as more coverage restrictions and

policy exclusions redefine historical SDI policy norms. Zurich,

the dominant SDI insurance insurer, continues to communicate

significant losses. In response, they issued a new Subguard®

policy form in Spring 2016. Zurich intends to lead the market

with these changes; however, other insurance insurers have been

slow to follow suit as general contractors take advantage of their

more competitive policy terms. As a result, the underwriting of

SDI has become increasingly difficult as competing SDI insurer

resources struggle to keep pace with demand. While there

have been no changes to the existing SDI policy forms outside

of Zurich, both XL and Arch have made directional changes,

further restricting their appetite and terms. There is an increased

emphasis on SDI underwriting in order to obtain the broadest

available terms in a market where insurer proposals increasingly

have more manuscript policy exclusions and other qualifications.

Currently, only Zurich and XL offer limits at a level acceptable to

the larger general contractors. In June 2016, a new entrant into

SDI, Cove Programs (Lloyds), placed its first SDI policy. Cove

Programs aims to provide higher limits required by the larger

general contractors by the 4th quarter of 2016, which would

make them more competitive with Zurich and XL



Pricing/Rates � In general, rates continued to rise but were driven on a case-by-case basis with retention levels playing a major role.

� Rate increases will continue to come into effect over the next three years as programs renew. We expect more tiered premium options based on project market segment and project coverage duration.

Limits �� No material change.Clients are maintaining limits purchased.


Deductibles/Retentions � Clients have elected to increase retentions to ease

the pressure of rate increases. � Increased retentions will continue to come into effect over the next three years as programs renew.

Coverage � Continued aversion to "for sale" residential portfolios and more limited coverage durations. � This trend is expected to continue, along with

limitations of exposure to certain trade classes.

Capacity/Appetite �� Capacity has increased with a fourth SDI

insurance insurer option; however, risk appetite continues to be a challenge as insurers limit coverage terms further.

�� This trend is expected to continue.

Losses � Claim activity increased significantly as losses continued to develop from coverage written during the 2010-2012 years following the recession.

�� Claim frequency and severity show signs of retraction as coverage becomes further distanced from the 2010-2012 policy years.

United States

Contacts

Global

Nate EspeChicago, [email protected]

Geoffrey HeekinChicago, [email protected]

Michael HerrodHouston, [email protected]

Henry LombardiNew York, [email protected]

Tariq TaherbhaiChicago, [email protected]

Africa

Darlington MunhuwaniJohannesburg, South [email protected]

Justin RussellJohannesburg, South [email protected]

Asia & Pacific

Alister BurleyMelbourne, [email protected]

Sebastian KorczStuttgart, [email protected]

James MacNealLondon, [email protected]

Olof MångsStockholm, [email protected]

Francesco PeriniMilan, [email protected]

Latin America

Clemens FreitagSao Paulo, [email protected]

Alexander RianoMiami, [email protected]

Milena Milani SoaresMiami, [email protected]

Mariano VialeMiami, [email protected]

Mark ChanShanghai, [email protected]

Junko KunimitsuTokyo, [email protected]

Nicki TilneySingapore, [email protected]

Europe & Middle East

Steffen AabelOslo, [email protected]

Jean-David BenatarParis, [email protected]

Alfonso Garcia LarriuMadrid, [email protected]

Karl HennessyLondon, [email protected]

Robert HumphreysLondon, [email protected]

Michiel Ebeling KoningAmsterdam, [email protected]

North America

David BowcottToronto, [email protected]

Galen BrislanePembroke, [email protected]

Doug CorreaVancouver, [email protected]

Jim GloriodSt. Louis, [email protected]

Allan HetzToronto, [email protected]

Scott TretheweyMiami, [email protected]

Matt WalshChicago, [email protected]

Kevin WhiteBoston, [email protected]

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© Aon plc 2016 . All rights reserved .The information contained herein and the statements expressed are of a general nature and are not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information and use sources we consider reliable, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.

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Documents

Global Construction Infrastructure Market Update - 2016 Q2