Spanish construction: Unfinished business

The sun certainly isn't shining on the Spanish property market. Around one million new houses and apartments remain unsold, and this February the country suffered its second biggest corporate crash as real estate firm Reyal Urbis filed for insolvency.

Work slowdown

Other casualties are expected to follow as Spain's well documented economic problems show no signs of abating and banks continue to be reluctant to fund commercial or residential building projects. Other than a port project in Barcelona, there is also very little work being carried out by the government's Ministerio de Fomento (the Spanish Ministry of Development).

According to Marco Cidoncha, head of industrial business at Zurich Global Corporate Spain, Spanish property companies have reduced in number from around 5000 at the peak of the property bubble in 2007 to around 1400 today. Residential start-ups have also reduced over the same period from 650 000 a year to around 65 000 a year. This has, understandably, had an impact on the countries property insurers.

Market covers 

The only compulsory insurance for residential construction is decennial liability insurance, which has been required by law since the Spanish Construction Act came into force in 2000. It provides a 10 year guarantee in respect of structural damage to the building.

"The rates were even starting to decrease before the bubble burst in 2008 but I think they are now finally beginning to level off." Chapman

Miguel Relano, partner in the Spanish office at lawyers DAC Beachcroft, says "No residential building can be registered without decennial liability cover but claims can only be made if the structural element of the building is affected and the mechanical resistance and stability of the building is jeopardised. This cover has been very popular and profitable for insurers because it is mandatory, and loss rates are very low as a result of it being very rare for policyholders to meet the claims criteria."

Construction all risks insurance is the other main cover, and can include primary third party liability (including employer's liability) and - if required - advanced loss of profits if there is a delay in termination of the work. Also popular is professional indemnity insurance for architects and engineers.

Demand for all these covers has inevitably been severely affected by the property downturn. Decennial liability insurance reduced by 62% in 2012 year-on-year and that construction all risks cover reduced by 33% over the same period.

Rate reductions

However, there is no evidence to suggest contractors are continuing to build without adequate insurance. The fact that rates have tumbled as a result of fierce competition between insurers has undoubtedly helped.

Jon Chapman, international projects manager at JLT Spain, says: "When there is an insurance opportunity there are still a lot of players trying to write the same business, and the rates have gone down by 30% or 40% for residential building projects. Both construction all risks and decennial liability cover have been reducing by similar margins. The rates were even starting to decrease before the bubble burst in 2008 but I think they are now finally beginning to level off."

"There is a severe problem in that some owners are facing bankruptcy and so projects are not being handed over or accepted by the owner." Hayward

Unfinished business

Meanwhile, the downturn has left several buildings incomplete. In Badajoz, Spain, the Cerro Gordo housing development, consisting of several thousand apartments and small houses lays largely unfinished and eerily quiet.

However, incomplete buildings are not proving an insurmountable problem. The does not impact decennial liability insurance because the cover doesn't come into force until the work is fully completed, and construction all risks policies include clauses that pause or cancel the cover in the event of work being interrupted.

Julia Hayward, client director at Aon Risk Solutions, global broking centre, construction, says "Cover can be provided for incomplete risks subject to certain protection and security measures being in place. However, there is a severe problem in that some owners are facing bankruptcy and so projects are not being handed over or accepted by the owner.

She adds: "Insurers have had to adapt to meet the changing demands of the current environment by developing cover for ‘silent' risks or for work that has been slowed down because of lack of available funds, or for that which has been completed but not handed over."

Overseas activity

With Spanish contractors increasingly working internationally, the property downturn has impacted more severely on domestic insurers who have yet to adequately diversify abroad than it has on the large global insurers. The larger Spanish construction companies started working overseas a decade ago and many smaller and medium sized firms have followed suit within the last two years.

Joao Condo Buzio, divisional director of construction, property and casualty at Willis, says: "The vast majority of projects that the Spanish contractors are bidding for are energy-based or involved with transportation. Geographically, South America is their natural market as they are leaders in the region. However, they have also been very active in the US and Eastern Europe."

"There are opportunities in tenant insurance as a lot of banks own huge numbers of unsold properties." Cidoncha

Zurich's Spanish construction department has been able to balance the decrease in domestic business with pent-up demand from overseas projects undertaken by Spanish construction companies.

Global issues

Cidoncha says: "When customers go abroad they have to face many different cultures and risks and they want more sophisticated products, so this has favoured the large global players who have been geared to providing international solutions for years. But some purely Spanish insurers have only recently started looking internationally."

Relano believes that local insurers have also been slow to adapt to take advantage of other potential local opportunities. He says "There are opportunities in tenant insurance as a lot of banks own huge numbers of unsold properties, so they need to rent them and may need insurance for lack of payment of rent or for legal defence costs or vandalism caused by tenants or third parties."

He concludes: "There could also be demand for all risk household policies covering material damage to residential properties and for insurance for real estate transactions covering issues like failure to register the mortgage or defects in purchase deeds."