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Defective building products store up trouble for insurers

Source: Asia Insurance Review | Apr 2018

Australia Property & Casualty Risk Management

Flammable and leaky cladding, sub-standard steel, toxic plasterboard and exploding glass. Emerging construction risks can have a big impact across insurance classes. Mr Nicholas Murphy of Gen Re elaborates.
Scandals over defective building products are rarely out of the headlines these days. None was more shocking than the Grenfell Tower disaster in the UK last year. Eighty people were killed when the West London residential apartment block went up in flames in June 2017.
   Sadly, defective construction materials used inside and out are the cause of serious health and safety issues right around the world today, including the Asia-Pacific region. Mouldy buildings, low grade plasterboard that emits toxic gas, sub-standard structural steel, asbestos in public buildings and exploding plate glass are a big cause for concern – and potentially a source of widespread property-casualty claims.
Grenfell Tower’s cladding and insulation
The Grenfell Tower building was refurbished at a cost of GBP10 million (US$14 million) in 2016, including the installation of exterior cladding. More than 60 firms were involved in the renovation. The fire started in a fridge freezer and spread up one side of the building externally, before engulfing the entire block.
   The blaze affected most of the building’s 24 floors and destroyed 151 homes, both in the tower and surrounding areas. 
   The cladding has come under scrutiny, with experts saying a more fire-resistant type could have been used. Both the cladding and insulation on the outside of the building failed all preliminary tests by the authorities. The insulation samples burned more quickly than the cladding tiles.
   Grenfell was the most deadly fire that has been blamed on defective cladding, but it is by no means the first. In November 2014, the Lacrosse apartment block in Melbourne was engulfed in flames, though miraculously no one was killed. 
VBA says all used flammable cladding need to be removed
The fireproof exterior cladding on the building, imported from China, did not meet specifications. Subsequent audits by the Victorian Building Authority (VBA) found the problem was widespread: out of 168 new high rise buildings inspected in the state of Victoria, 51% failed to meet specifications. Many more buildings are being inspected.
   The VBA ordered the builders and owners of the Lacrosse apartments to remove the cladding, at a cost of millions of dollars. The head of VBA says all buildings that have used flammable cladding will need to have it removed – an operation likely to cost billions of dollars. 
Defective cladding common across the world
Outside the state of Victoria, throughout Australia and in New Zealand, it is likely that a similar incidence of defective imported fireproof cladding exists. In New South Wales, the government audited 180,000 residential and commercial towers built since the 1980s and found that as many as 1,000 could have unsafe cladding.
   The Middle East and especially Dubai has seen its share of fires spread by exterior cladding. There were three high rise tower fires in 2012; in August 2017 Dubai’s 337m Torch Tower caught fire for the second time in two years.
   The United Arab Emirates revised a safety code in 2013 so that new buildings over 15m (50ft) tall must have fire-resistant exterior cladding, but the rule does not apply to older buildings.
Leaky buildings grow mouldy
Linked to defective exterior cladding systems, leaky buildings seem to be a growing problem around the world. Australia and New Zealand are no exception – especially in the wetter regions. 
   In Tasmania, the government identified its own leaky building syndrome in 2014, while Victoria has also established a task force to monitor similar issues. In New Zealand, structures built between 1994 and 2004, especially timber-framed buildings, have proven to be particularly susceptible to leaks and mould infestations.
   The Australian Building Codes Board modified the compliance path for weather tightness in 2016, but it remains to be seen how many older buildings will continue to deteriorate and whether the new code is adequately written and enforced.
No easy remedy available
Dodgy plasterboard is another source of problems indoors. In Australia, defective plasterboard imported from China has caused a public outcry. The low grade fly ash waste used in the plaster composition, which has already created a multi-billion dollar liability issue in the US, allegedly emits several gases, including carbon disulfide, carbonyl sulfide and hydrogen sulfide. It causes metal to corrode, electrical equipment to break down, and galvanised nails and truss supports to rust out.
   To make matters worse, no easy remedy seems available to homeowners or contractors as a complete re-build of the affected building’s interior is often required. The catalogue of health and safety issues related to defective building products seems endless: asbestos is still found in new building materials sourced from China, for example. 
Defective structural steel
Even steel has been found wanting, with sub-standard products used in infrastructure projects proving too weak or too brittle and prone to failure. 
   In New Zealand, steel intended for a NZ$450 million (US$326 million) road bypass scheme failed strength tests. In Western Australia, steel for a major bridge construction scheme failed safety tests. New Zealand, even more so than Australia, may have some very serious problems with defective structural steel in the future, due to the country’s ever-present earthquake threat.
   Exploding glass has been identified as another emerging risk after several dramatic incidents: two glass balustrades came crashing down from a high rise in Melbourne, narrowly missing pedestrians in the street below; a similar near miss happened in central Wellington, NZ. The cases of spontaneous glass breakage have been attributed to poor manufacturing and sub-standard materials.
Underwriters take note
Such widespread problems with defective building products have serious implications for property-casualty insurers in Asia-Pacific. Many of these product defects affect several classes of business and could lead to a significant rise in attritional losses, not to mention single large risk losses. 
   Insurers urgently need to identify the risk potential of all these problems and a global perspective is necessary. If insurers only consider the issues that have already arisen in their market they could overlook exposures that have not yet made themselves known. 
   For example, while NZ underwriters are addressing leaky building risk they are not adequately addressing the potential flammability of defective cladding. Meanwhile, Australian underwriters are neglecting the potential lack of weather-tightness in cladding - even though they are addressing its fire risk. Put bluntly, too much attention is paid to local headline issues and not enough to the exposures that have not yet emerged in their particular market. As a generalisation, this is also common beyond Australia in the broader Asian insurance market. 
Consistent approach needed
What specific underwriting actions should insurers, in respective classes, consider? 
   Insurers should first make a decision at portfolio management level as to whether each of these risks should be underwritten or excluded. This should then be formally addressed in their underwriting guidelines to ensure a consistent approach is taken and that their portfolio complies with company risk tolerance – and that pricing is adequate. 
   It is also advisable to make sure a consistent approach is taken across all affected insurance classes; the product managers of individual classes should not be acting alone. For all classes, remaining silent will lead to anti-selection and unknown accumulations. 
   Managing emerging risks to do with defective building products is not easy because the picture is changing all the time. But Gen Re has a global experience of this area. We have specialists in many countries and can draw upon this expertise to help clients address such emerging risks in a wide range of classes and across markets. Do not hesitate to get in touch with us if you have concerns over the implications of defective building products for your business. A 
Mr Nicholas Murphy is Liability Practice Leader, Gen Re, Sydney, Australia.
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