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Can the risk market in the UK facilitate sustainable construction? With Oliver Schofield, director, Lignum Risk Partners

08.12.22 AdvantageGo

These are exciting times for the construction market. In 2021, the UK government released its Net Zero Strategy: Build Back Greener, which outlines its expectations for the construction industry to decarbonise. So far, there have been encouraging signs of progress: The UK construction sector has taken a number of significant steps towards net zero, according to data published only last week by the Construction Leadership Council (CLC). According to the first annual review of progress, there is evidence that UK construction is playing a leading role in cutting carbon. The annual ‘CO2nstruct Zero Performance Dashboard’ shows that the last 12 months have seen the sector train more than 500 retrofit co-ordinators, with associated business accreditation; connect 55,000 heat pumps by 4,100 trained & registered installers; deliver a 33% increase in EV charging points; and including carbon literacy in professional qualifications. However, there is one area where sustainable construction efforts still fall short in places – and that is when it comes to insurance. Underwriters remain wary of developers in some cases, and a lack of data continues to cause difficulties. Despite such challenges, both sides can work more closely together for the greater good of sustainable construction, according to this week’s Big Question.

Adrian Bastow, CMO, AdvantageGo

“What we know from the research we have done and the clients we have spoken to is that the broad UK construction sector is very, very keen to achieve carbon net zero by 2030 in all of its developments, all of its construction, and all of its ongoing management in the built environment,” says Oliver Schofield, a veteran of the alternative risk transfer market and a director of Lignum Risk Partners.

The most straightforward way of reducing our carbon footprint in the built environment, he says, is to reduce our reliance on using steel and concrete in buildings, as they obviously do take a huge amount of carbon and other resources to construct.

So where does insurance come into this process? “I suppose the easiest way of summing that up would be caution. They are very cautious about the exposures of using timber and other sustainable materials such as hemp in buildings. Their concern comes from the fact that they believe they do not have sufficient data to make a judgement as to the risk nature of these new materials. Therefore they will take their time and will be very cautious as to how they deploy their capital and their capacity for these structures. There is a market. The market in the UK is providing cover for the use of timber during construction, but the real challenge comes in finding capacity for the built environment – for buildings that have timber core and a timber frame. And capacity for that market is certainly sub $200 million per property, which is far from ideal.”

Which brings us to the nub of the question: how do we get insurers on board then? Does it require better risk management, better regulation, improved legislation, more granular data- or a combination of all of these?

“Yes, it is a mixture, but let’s focus on the data: timber has been used in construction around the world for a long, long time. If you look at the Australian market, the North American market, the continental European market – particularly in the Nordics but also going down into places like Switzerland, Austria and Germany – timber has been used in construction for a long, long time. Those markets are quite happy to write that risk. They charge a little bit more than for conventional steel and concrete, but it’s certainly manageable within the budgets. Over here in the UK, the London Market does not have the experience of writing pure timber. Therefore it does not have the data which is specific to the UK environment – you can’t really compare the climatic environment in Australia to that in the UK, so some of the data that underwriters have been asked to consider has been met with scant regard because it does not match the UK environment.”

Is there a way around this in terms of supplying better data? “There isn’t an easy overnight solution, but there is a solution. Part of that solution is making sure that the construction industry and the built environment in the UK can work hand-in-hand with the capital markets and insurers in the UK. Trust is an important part of that. Unfortunately, the construction market has had its moments over the last 40-50 years, whether that is Ronan Point, whether it is Grenfell, the construction market has had significant problems, and in the eyes of insurers, their approach to overall site safety and risk management is not where it needs to be, generally speaking across the broad UK sector. Clearly, when you get into the large construction firms and large development firms, their risk management is very much top of the class.”

Schofield says that Lignum Risk Partners, a new joint venture established earlier this year, brings claims mediation and claims settlement expertise, architectural expertise, and alternative risk transfer capabilities. Together, he suggests, the firm is working with a number of UK developers to build a new alternative risk transfer solution to enable them to drive forward towards carbon net zero by 2030 through the use or increased use of timber and other sustainable materials in their buildings.

“But it’s a difficult sell on both sides of the coin as you try to build a community of trust amongst a group of organisations that are inherently competitors. That is the first challenge, and we have spent the last year and a half working with developers, and we have built that community of trust.”

“The other side of that coin is trying to find willing capital to support a risk that, from the UK insurance market perspective, is relatively unknown and untested. There are huge challenges in bringing the two sides together.”

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