The success of evergreen policies in other markets makes a case for their use in the construction market, according to the Chartered Insurance Institute, whose study into the pros and cons of evergreen policies argues that they would bring more control, improved client relations, better retention rates, and a useful hedging mechanism in what experts believe is a hardening market.

“Evergreen policies are the future of construction insurance," the CII's Oliver Scott said. "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.”

Director of policy and public affairs at the institute, Matthew Connell, added: “In order to increase trust in our united profession, it is vitally important to consider unmet needs and how to address them.”


Evergreen policies: Benefit and challenges (Source: The Future of Construction Insurance, CII)

Evergreen policies run in perpetuity until either the insured or the insurer gives 12 months’ notice to renegotiate or cancel the policy.

Benefits:

1. 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.

2. 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.

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

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

Challenges:

1. 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.

2. 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.

3. Authority of underwriters: Most insurers permit each of their underwriters 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.

4. Regulatory: Under Solvency II, insurers will need enough capital to have 99.5% 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.

See the next issue of CIR for more on the CII’s report, as well as on insurance in the construction sector in general.

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