Construction risk insights

photoConstruction risk insightsSpring 2016

2 willistowerswatson.com

Willis Towers Watson: The start of an exciting journey

On the 5th January of this year we started operating as Willis Towers Watson following the successful completion of the merger of Willis Group and Towers Watson. As such, we have now become a leading global advisory, broking, and solutions company with 39,000 employees in more than 120 countries.

By bringing together two highly complementary businesses we have created a powerful new client proposition and significantly enhanced the depth and breadth of our offering, capabilities and geographic reach.

To find out more visit www.willistowerswatson.com

In this issue

Using surety to free up capital 3

Tackling short-term absence 5

New era, new risks for UK construction 6

Our new company: A truly compelling combination 9

A game changer: The 2015 Insurance Act 10

Construction risk insights 3

Commercial surety is a more effective form of capital than bank guarantees and there is high appetite for the business, but UK contractors are still not making full use of the market. Sally Hinchey explores why surety has not received the attention it deserves.

The UK construction slowdown of the last few years has prompted numerous contractors to move into new territories, albeit not at the rate that some anticipated (with only one of the top ten European contractors a UK-based firm). Those that have done so have had to get to grips with local legislation and forms of contract, which in many countries includes the requirement for bonds and guarantees.

The fact is that contractors on many overseas projects are expected to have deep enough pockets to co-finance projects. For these firms the traditional solution has been bank guarantees and irrevocable letters of credit (ILOC).

For those contractors who have a close working relationship with their bank, this has been a straightforward solution to ensuring the necessary guarantees are in place in order to meet overseas contract agreements. The problem is, ILOCs tie up working capital at a time when balance sheets remain under pressure.

Despite the upturn in construction activity, both in the UK and globally, contractor profit margins remain under pressure with little room for error. Profit margins among the UK’s biggest contractors more than halved in the 12 months between September 2014 and September 2015 to 1.2%, according to Construction News. The top 100 fared only slightly better, with average operating margins falling from 2.4% in 2014 to 1.9% in 2015.

As a result of this pressure, the top tier of 15 UK contractors is expected to shrink by at least half over the next five years as a result of M&A activity, according to EY. Consolidation is one route out of a difficult market. Another is making better use of the surety market to finance transactions and free up working capital.

Using surety to free up capital


Case study:

Sourcing a creative, and quick, surety alternative We recently worked with one of our key surety markets to secure approval for up to $60m in capacity for a new customer, with no collateral, and with the lowest rate known to have been achieved for this type of obligation.

In this example, security was required of a client to guarantee an underlying agreement/contract. This was an international obligation with a foreign obligee. An alternative form of security was contemplated by the European partner, but they were unwilling to utilise this form of security to back a Letter of Credit or to pledge it directly to the foreign obligee.

The solution: We utilised a domestic arrangement with the surety in lieu of a Letter of Credit to the obligee as a creative alternative, thereby allowing for the alternate assurance of a bond, acceptable to the obligee. Given the complexity of the terms, the number of legal documents to be executed, the global spread of the players (Europe, North America, and Latin America), the security arrangements, and the short time frame (ten days), a high degree of coordination was required.

Willis Towers Watson partnered with a specialised surety market, one that was nimble enough to meet these requirements. The deal involved the surety’s highest level decision-maker possible – the CEO of the surety’s parent insurance company.

The outcome: This $60m bond was executed and delivered on time, saving the client a significant amount of money and reducing their risk associated with posting security.

2.4% Average operating profit margin: CN100 2014

1.9% Average operating profit margin: CN100 2015

Contingent capital

Since surety remains the most cost effective form of capital, a growing number of companies are now maximising their surety capacity to replace ILOC’s and release restricted capital at preferred terms. We are highlighting the benefits in our discussions with clients, pointing out that sureties are aggressively pursuing new business as the construction economy continues its gradual recovery.

The competitive environment is pushing sureties to focus on middle market contractors and commercial surety. The 2016 forecast includes a moderate top-line premium growth for the industry, with premium pricing coming under pressure as a result of industry competition. All of this spells opportunity for UK contractors, particularly those operating abroad.

While surety is accepted as contract security in many countries, ILOCs dominate in others. Some countries require that all bonds and insurance policies must be written locally on an admitted basis, which may require a local license or fronting relationship. Local banks can be used to front these transactions, which can then be reinsured into the surety market.

This was a good solution for one client, whose finance director was reluctant to entertain surety due to an excellent working relationship with their bank in a number of territories. In this instance, “back-to-back” bonding was a win-win for the bank and the client. Providing back-to-back guarantees frees up additional borrowing limits to fund operations and reduce costs.

Through our dialogue with clients and prospects it is apparent that many contractors continue to seek traditional bank guarantees, without considering surety as a viable alternative. These ILOCs can range from a few hundred thousand pounds up to a couple of million, putting significant strain on working capital.

It is our intention to raise awareness of the full capabilities of the surety market, at a time when this remains the most effective form of capital. The intense competition for the business from the surety market, with the race for market share demonstrated by ACE’s recent $28.3bn acquisition of Chubb, is another compelling reason to consider surety, with a push to further reduce premiums.

For more information, please contact: Sally Hinchey Account Director, Surety +44 (0)29 2037 5810 [email protected]

Source: Construction News


Many organisations now collect absence statistics but few combine them with other data sets to explore trends and issues with a view to reducing absence. This not only limits outcomes but also helps ensure that people issues rarely make it to their rightful place – namely strategic board level. In this article, we take a look at the benefits of taking a much more integrated approach across your organisation’s Risk and HR functions to tackle absence and, moreover, help turn business strategy into results through your people.

It’s high time to combine everything - from engagement surveys, entry and exit interviews to insurance claims data, the latter spanning everything from health, risk, employers’ liability, employee assistance programmes and occupational health. This isn’t blue sky, big data nirvana…This is a totally new and essential approach being introduced by Willis Towers Watson. It is happening now and it is much needed. Take the latest data from the Chartered Institute of Personnel & Development (CIPD), as an example.

Although it’s encouraging to learn that 87% of organisations across all industry sectors now collect absence data, according to the CIPD’s 2015 Absence Management Survey, only a third (33%) combine absence data with other data sets to explore trends and issues. Those that did in 2014 were twice as likely to achieve absence targets compared with those that didn’t (34% vs 16%).

Pinpoint a problem

Musculoskeletal Disorders (MSDs) still, by far, represent the thorn in the side of the construction industry when it comes to short-term (up to 4 weeks) absence. 64% of self-reported work related illness was due to MSDs in 2014/15, according to latest statistics from the Health & Safety Executive (HSE). In fact, data from a GP reporting scheme of new cases of occupational illness found last year that the rate of work-related MSDs in the construction sector was almost twice that across all industries.

The overall cost of workplace injuries and illness to the construction sector now stands at around £0.9bn, according to the HSE. But it’s not only the financial cost to individual business’ and the UK economy, but also the difficult to quantify aspects such as impact upon corporate reputation and the inevitable knock-on effect on recruitment and retention. In the current ‘war for talent’ across the construction sector, the value of reputation cannot be overestimated.

Value your talent

So how do we elevate all of these issues to strategic board level and ensure a truly joined-up approach to their monitoring, management and mitigation?

The key is for organisation’s to place a value on their ‘intangible’ assets. This is no mean feat but it is something on which the CIPD is currently working via its ‘Valuing Your Talent’ initiative.

A survey by the CIPD of more than 300 global executives found that non-financial assets such as knowledge and human capital, customer relationships and intellectual property represent some of an organisation’s most important assets in determining its value - well over and above things like financial assets, manufacturing assets and shareholder value. In effect, 68% of key business factors were people related.

The CIPD, together with various industry bodies, is developing the ‘Valuing Your Talent’ framework to help organisations understand and measure the impact of their people on business performance and, in doing so, realise the full potential of their workforce. This initiative, to which Willis Towers Watson has been asked to provide its employee risk insight and expertise, is helping to influence Government thinking around workforce management and transparent reporting.

Take action

Willis Towers Watson can help you manage, monitor and mitigate your employee risk now: ensuring that all of your internal and external stakeholders work collaboratively, getting employee health issues onto the Board agenda – alongside safety - tackling absence at the root cause and bringing measurable results, whilst, at the same time, helping to improve recruitment and retention.

For more information, please contact: James Spencer Client Development Manager +44 (0)20 3124 7472 [email protected]

Tackling short-term absence


New era, new risks for UK constructionAfter a long slowdown following the financial crisis, the UK construction market is bursting to life again... not just in London but all around the country. While the opportunities abound, this new era of construction also brings new and emerging risks.


Construction output is set to grow by 3.6% in 2016 and 4.3% in 2017 according to the latest outlook from Experian (UK Construction Forecast, October 2015). In its autumn update, it forecast that total output for all work in the construction sector was set to hit £142bn in 2017, up from £131bn in 2015, accounting for around 6.3% of GDP. These are signs the recession is well and truly in the past.

Megaprojects

At the heart of the anticipated construction recovery are megaprojects ranging from nuclear power stations to HS2, a second Crossrail tunnel in London, railway upgrades and the Thames Tideway Tunnel. However, private commercial construction is expected to show the fastest growth for 2016. According to the Markit CIPS Purchasing Managers’ Survey, the sector is highly upbeat about prospects for growth over the next 12 months, with nearly half expecting a rise in business activity.

As major projects such as Crossrail and Thameslink wind down, there is significant anticipation as the new generation of megaprojects come online. In February the HS2 rail headquarters opened in Birmingham as Phase One of the high speed project, which will reduce rail times between Birmingham and London by 32 minutes, gets underway in 2017.

Phase One is currently due for completion in 2026 and Phase Two - with lines to Leeds and Manchester - planned for completion in 2033. This project is hugely significant for the UK as a whole as well as the construction industry and promises to rebalance the economy, boosting growth in the Midlands and North of the UK. In decades to come, it is not unreasonable to think that the skylines of cities such as Birmingham, Manchester and Leeds could begin to resemble London.

While controversial, construction of new nuclear power plants will also offer a significant boost to UK construction. In October, the go-ahead was given for Hinkley Point to begin construction after the Chinese had agreed to fund one third of the projected £18bn cost of the project. Although recent reports have raised doubts as to the project’s future, currently Hinkley is expected to start generating in 2025 and should provide 3.2 gigawatts of power, meeting seven percent of the UK’s electricity needs.

51 minutes Projected journey time using HS2 from London to the East Midlands Hub

Challenges

As construction companies ready themselves for the upsurge in activity, Willis Towers Watson will be pointing out to them some of the challenges they are likely to face in this new growth era. Not least of these is the shortage of talent. It is estimated the construction workforce has contracted by as much as 13% since the height of the financial crisis in 2008.

While new technology, including the use of robotics, drones and 3D printing may go some way to plugging the skills gap, competition for skilled architects, engineers and computer specialists is likely to be fierce over the next few years. As a result, wages across the sector are rising at three times the national average of 2%, according to research by the RICS. It also found that bricklayers and quantity surveyors were in particularly short supply.

Attracting millennials into the construction industry will inevitably be assisted by construction firms embracing the digital age. At the heart of this is Business Information Modelling (BIM), which is government-led and driven by digitising front office processes. As hardware, software and cloud applications offer an even greater capability to handle data, BIM is anticipated to become a key aspect of many future projects.

Among other top innovations in construction are kinetic roads, 3D modelling and cloud collaboration, according to the Sunday Times’ Future of Construction report. These innovations should bring about significant business efficiencies, using robotics for instance to carry out repetitive tasks on construction sites. However, they also introduce new risks, in particular cyber security.


Cyber threats

The risk from cyber criminals is very real, particularly for large projects. Recent incidents have shown that beyond the ability to hack into networks and cause damage to computer hardware and servers, there is also potential to cause physical damage. In 2014, a blast furnace at a German steel mill suffered “massive damage” after a cyber attack at the plant’s network.

Cyber attacks, particularly where data is compromised, can also damage reputations. New data protection laws will soon make it compulsory for firms to disclose where sensitive information has been breached through a cyber intrusion. And there will be steeper fines and penalties for organisations that fail to adequately protect third-party data.

For all these reasons, including potential non-damage business interruption, Willis Towers Watson is talking to its clients about the need to invest in cyber security, risk management and risk transfer solutions. Among our staff are cyber experts, including former GCHQ employees, who understand this rapidly evolving threat environment and can advise on how to avoid being the low-hanging fruit.

Other risks and exposures in this new era of growth will be more familiar. When computers became common back in the 1980s theft of hard drives was a significant and costly issue for many business owners. Today, expensive robotic-controlled machinery are the highly desirable and targetable assets and their owners will face similar challenges in securing them.

With widespread flooding across Cumbria, the Scottish borders and Yorkshire this Winter, extreme weather is another reality of operating in today’s environment. A project such as HS2, which is not confined to a single site, is inevitably more exposed to delays caused by continual bad weather.

We are trying to answer some of these challenges by bringing weather products, non-damage BI products and cyber covers into the market, to help plug any gaps not covered by traditional construction-all-risk and general liability policies. It is critical, that as the UK construction industry continues to evolve that the insurance industry evolves with it, understanding new exposures and innovating to offer products that cater to these risks.

For more information, please contact: John Roberts UK Construction Industry Leader +44 (0)20 3124 8431 [email protected]

Stephen Cox Executive Director, UK Construction Practice +44 (0)20 3124 8979 [email protected]


A strong client focus, an emphasis on teamwork, unwavering integrity, mutual respect and a constant striving for excellence are the values at the core of the new Willis Towers Watson organization.

39,000 colleagues

in 120+ countries

Scale, diversity and financial strength

$8.2 billion revenue

Our new company: A truly compelling combination

We aim to be the leading global advisory, broking and solutions company. We have relationships with:

85% of the U.S.

Fortune 1000

90% of the Global Fortune 500

Over 20K middle-market

clients

97% of top 65

global insurers

A deep history

dating back

to 1828

Willis Towers Watson colleagues can be found all around the world:

North America: 36%

Great Britain: 16%Western Europe: 18%

International: 30%

Total: 39,000


The 2015 Insurance Act has been years in the making and the end product is a fantastic result for all in the market. Most importantly, it creates a new legal framework for commercial insurance that will give policyholders added protection. But for all parties – buyer, seller and broker – there is a lot of work still to be done to ensure a smooth transition when the changes come into force in August this year.

Why is it so important? Under the current out-of-date legal framework, many policyholders are frustrated that they do not have reasonable certainty that policies will pay out if needed. This is largely because insurers have draconian powers to avoid paying large claims for trivial or irrelevant reasons.

As many insurance buyers will know from first-hand experience, the use of basis clauses and warranties can mean that if a company makes an innocent but trivial mistake, like the misspelling of a name, their insurer is legally entitled to void the policy. Similarly, claims may be refused because the buyer has failed to provide all material information at the time of purchase – even when it had not been requested by the insurer.

It would only be fair to say that the old system works most of the time. Generally speaking insurers will pay out whenever they think their client has acted in good faith, but there is no guarantee that this will happen. And what is the point of insurance if it does not give you total confidence that it will support you in your moment of need?

SMEs are especially vulnerable to insurers who may choose to exploit loopholes in the law since they have less buying power and therefore less clout with insurers and probably do not have the same close relations with their underwriters as the large multi-national companies.

The Act is therefore a game-changer. When it comes into force on 1 August 2016 it will protect any policyholder who acts in good faith but may have overlooked some technicality. It will also bring the UK into line with most other markets.

By and large, the insurance market has been positive and responsive. They have recognized that the UK is out of step with the rest of the world and the provisions of the current regime under the 1906 Act are indefensible.

A game changer: The 2015 Insurance ActBy guest contributor John Hurrell, CEO, AIRMIC


Certain parts of the London specialty market have been resistant to some of the changes but now that the Act is law, I’m expecting the market to embrace it with enthusiasm. Indeed, although underwriters have until August, many large insurers are already underwriting according to the terms of the new law.

Although the reform is overwhelmingly good news for policyholders, there are obligations for insurance buyers as well as underwriters. For example, the Act makes clear that insurance buyers will have a duty to disclose “every material circumstances they know or ought to know”, and ensure the information is presented in a “clear and accessible” manner.

Indeed, it is important to stress that the new legal framework will still require commercial insurance buyers to behave in a professional, thorough manner and to provide accurate information. That means going through the policy line-by-line with your professional advisors and making sure that it will do what you want. Perhaps not the most exciting job in the world, but it could save you a lot of disappointment.

To ensure they are in the best position to take advantage of the changes, Airmic is urging all insurance managers to make careful preparations well before the law takes effect, and to talk to their brokers and underwriters as soon as possible.

Ensuring a smooth transition will require market-wide cooperation. The Act represents huge change and with any change there is uncertainty and ambiguity. Buyers, brokers and underwriters need to have open and frank discussions about how they are interpreting wordings, what their expectations are from the various parties and how they expect market norms to evolve.

For example, policyholders need to check that their insurers are comfortable with their interpretation of what constitutes fair presentation of risk under the new law, while insurers should be asking what more they can do to share their views on what they consider acceptable. All sides of the market will need to ask themselves what is an acceptable process for a policyholder to undertake to satisfy a “reasonable search”.

We are now only a few months away and it’s better to have conversations with brokers and underwriters now rather than as the deadline approaches. This will be vital to ensure a successful transition for all.

February 12, 2015 The date on which The Insurance Act officially became UK law

The 2015 Insurance Act There are three core changes that will come into force in August 2016:

Fair presentation of risk:The bill amends the duty on business policyholders to disclose risk information to insurers before entering into an insurance contract, introducing a duty of ‘fair presentation’ of the risk.

The new law also provides proportionate remedies in cases where the duty of fair presentation has been breached. For example, if the breach was accidental but the insurer would have entered into the contract in full anyway, the insurer still has to pay out in full. However, if the insurer would have still entered the contract but on different terms, the insurer may proportionately reduce the amount to be paid on a claim. If the breach is deemed reckless or deliberate, the insurer can avoid the contract and keep the premium.

Warranties:The bill abolishes “basis of the contract” clauses, which have the effect of converting pre-contractual information supplied to insurers into warranties without further discussion. It also provides that the insurer’s liability should be suspended, rather than discharged entirely, in the event of a breach of warranty.

The new law also prevents an insurer from relying on non-compliance with a warranty as grounds for avoiding liability for a loss of an entirely different kind than that envisaged by the warranty. For example, it would no longer be viable to avoid paying a claim for fire damage simply because the burglar alarm was not switched on as the two are clearly unrelated.

Fraudulent claims:The bill provides the insurer with clear, robust remedies when a policyholder submits a fraudulent claim.

This Construction risks insight publication offers a general overview of its subject matter. It does not necessarily address every aspect of its subject or every product available in the market. It is not intended to be, and should not be, used to replace specific advice relating to individual situations and we do not offer, and this should not be seen as, legal, accounting or tax advice. If you intend to take any action or make any decision on the basis of the content of this publication you should first seek specific advice from an appropriate professional. Some of the information in this publication may be compiled from third party sources we consider to be reliable, however we do not guarantee and are not responsible for the accuracy of such. The information given in this publication is believed to be accurate at the time of publication shown at the front of this document. This information may have subsequently changed or have been superseded, and should not be relied upon to be accurate or suitable after this date. The views expressed are not necessarily those of the Willis Group. Copyright Willis Limited 2016. All rights reserved.

The Willis Construction Practice is a division of Willis Limited, Registered number: 181116 England and Wales. Registered address: 51 Lime Street, London EC3M 7DQ. A Lloyd’s Broker. Authorised and regulated by the Financial Conduct Authority for its general insurance mediation activities only.

FP2053/15667/05/16

willistowerswatson.com

About Willis Towers WatsonWillis Towers Watson (NASDAQ: WLTW) is a leading global advisory, broking and solutions company that helps clients around the world turn risk into a path for growth. With roots dating to 1828, Willis Towers Watson has 39,000 employees in more than 120 countries. We design and deliver solutions that manage risk, optimize benefits, cultivate talent, and expand the power of capital to protect and strengthen institutions and individuals. Our unique perspective allows us to see the critical intersections between talent, assets and ideas — the dynamic formula that drives business performance. Together, we unlock potential. Learn more at willistowerswatson.com.

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