Business essentials Consulting Matters
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Could less PI insurance be a force for good? ONE OF THE GREATEST CHALLENGES THAT THE INSURANCE INDUSTRY FACES IN THE COMING DECADES WILL BE THAT OF CLIMATE CHANGE. HOW THE WORLD ADDRESSES THE CHALLENGE WILL DETERMINE THE OUTCOME - GOOD OR BAD.
On April 26 this year, Michael Bleby of the AFR wrote an article “The Hurdles Facing Covid-19 Stimulus Projects” exploring the consequences of the shrinking PI Insurance market in Australia. To quote, “Soaring premiums and limited appetite for risk that have increasingly stopped insurers from offering cover to building certifiers and surveyors are now affecting other professions, such as engineers – and extra work coming from stimulus spending will leave them even more exposed.” And this message is not new, the impact of the shrinking PI market has been explored in detail by Consult Australia and other industry groups in multiple forums over recent years, impacted especially by the issues emerging from Aluminium Composite Panels. The message that keeps on repeating itself is that the rules of the game are changing for the construction industry. "Australian construction's professional indemnity insurance crisis never went away. With their pools of capital dedicated to the insurance depleted, insurers slammed by combustible cladding-related claims against building certifiers are increasingly walking away from the unprofitable business line and that is leaving other professions without cover as well", to quote Michael Bleby again. But what do we mean when we talk about the “rules of the game” and what are consequences of them changing? It is useful to think of these rules as the things we take for granted when we are problem solving or making decisions on our projects. By holding the underlying rule i.e. that there is plentiful cheap insurance and parties willing to take on risk, our brain quickly make decisions and forms judgments that most of the time are right.
This explanation is based on the concepts of heuristics or System 1 and System 2 thinking explored in Thinking Fast and Slow by Daniel Kahneman. But if the rules of our game are changing, i.e. that risk can be cheaply and easily be transferred (whether to contractual counterparties or third-party insurers), then this automatic decision making becomes less likely to be right. In both examples given, the rule that risk is cheaply and easily transferred is flawed– in the first case by the straight out financial capacity of that counter-party to absorb risk and in the second case by the capacity or willingness of the insurance market to take on risk. Notably it is the shift in the insurance market which has made us pay attention to these rules - we have all been willing for a long time to ignore the first. But how can this be good for us you ask? With the rule safely in place - risk is cheaply quantified, transferred and not tackled head on - our intellectual investment in risk management comes to an early stop. With the rules gone, we must engage deeply and thoughtfully with the reality that there is risk, that it needs to be managed and that much of that risk rests with project owners and proponents. It means we will be forced to drive intellectual effort into risk management. Posing this issue publicly on LinkedIn I received an amazing response from Libby Pracilio, Associate Director at KPA Architects and her response reflected exactly the issue this change means: “…at first the thought of having limited PI coverage was unnerving. However,
the more I think about it, the more I've warmed to the idea and I think it could result in some opportunities for improvement in the broader construction industry. Risk management in design consultancy includes measures such as, but not exhaustively, enhanced design, documentation and coordination, as well as more thorough risk identification and management flowing up and down the contractual chain. It may also include a more collaborative approach to projects, both contractually and culturally, as well as a move towards value-based tendering. Limited PI coverage could motivate higher performance on an individual, office and project level, bringing higher quality project outcomes and requiring innovation, ongoing education and improved efficiency. Increased levels of service and improved outcomes would likely attract higher fees, which could go some way to addressing the issue of extremely lean professional fees and bids (i.e. the race to the bottom) across the industry. This is predominantly speculative, but the prospect of some positive changes arising out of a tough situation is encouraging!” I do not believe there will be a return to cheap and readily available PI Insurance (or certainly not any time soon). That means we need to engage with risk at a much deeper level and this can only be a force for good. Kiri Parr Kiri Parr Pty Ltd