Insurance Post

Thinking outside the box

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While prefabricated buildings bring countless advantages of cost and speed, insurance questions on performance remain unanswered. From water damage to fire hazards, Lynn Rouse explores the potential risks involved in modern building techniques

Concerns over the resilience and repairability of innovative construction techniques - often referred to as modern methods of construction - are increasingly being voiced by the insurance industry. MMC was a term coined for housing developments where demand for large numbers of cheaper dwellings is typically being met by prefabricated modules transported to position before being bolted together. Such volumetric buildings can come complete with plumbing, electrical services and even fittings, and their advantages are easy to see: quality-controlled 'pods' manufactured in a factory environment, with accelerated onsite assembly to the exclusion of many of the construction industry's traditional wet trades - all helping to reduce cost.

But these innovative applications are increasingly being used for industrial and commercial buildings - such as hotels, offices and fast-food restaurants - where insurance exposures far outweigh those associated with domestic premises. Without decades of experience on how buildings will perform, commercial underwriters are understandably wary and their concerns are similar to those with residential premises. "We are obviously looking at resilience and repairability but with commercial property also comes significant financial exposure to business interruption losses," explains Allister Smith, property risk manager at Norwich Union.

Anecdotal evidence suggests a potential for disproportionate repair costs in addition to worries over resilience to perils such as fire, flood and storm. Availability of replacement parts and pods in future is an added concern. "It is all very well adopting new and innovative construction techniques where currently there are a number of manufacturers. But the question has to be, if there is a fire in 10 or 20 years' time, will these firms still be around?" asks Malcolm Smith, commercial insurance manager at Groupama. "If not, these pods may need to be specifically made as one-off items, which would be very costly."

Furthermore, how do repairs that could literally involve dissembling a whole building, in order to replace a damaged pod before reconstructing it, impact on cost? "From a BI point of view this could be quite horrendous," comments Mr Smith.

About five years ago Groupama received a claim involving a hotel extension that was three or four storeys high comprising pod-type construction, after a fire broke out in the middle of it. "The extension was under construction at the time but almost complete. Rectifying the damage delayed the opening by nearly a year, with all the relevant BI losses - whereas the same fire in a traditional brick or breezeblock construction could have been put right in a couple of months."

Alan Gairns, development manager for property underwriting at Royal and Sun Alliance, points to another risk emanating from volumetric construction. "Pods are placed together, creating the opportunity for voids between rooms and floors and the possibility that fire will spread quicker. Insurer concern is that if we get a loss, that loss will potentially be magnified and the fire damage greater." He refers to an RSA claim involving a fire in a care home, which started in a toilet extractor fan. "Although the fire was quickly extinguished, the fact that there were voids between the walls and floors meant the fire brigade had to make holes in other rooms to check whether the fire had spread."

Shock of the new

Anxiety over developments in construction techniques does not end here - changes in insulation and plumbing are also playing their part. Insurers are concerned that enhanced energy efficiency performance could possibly result in negative effects elsewhere. "While insulation is protected internally and externally, our concerns from a property perspective revolve around the use and abuse of building structures," explains NU's Mr Smith. "These can get quite rough treatment and insulation protection can deteriorate over time. We have seen some relatively new buildings, with essentially decorative cladding systems, be compromised when fairly minor knocks have cracked the external face and exposed the combustible polymeric core.

"A key focus of this government has been to look very hard at the green aspects of buildings and their carbon footprint - but that mustn't be to the detriment of fire risk."

He also points to concerns over the move to plastic push-fit connections in plumbing, which have already resulted in some significant water damage claims. Indeed, an article in Cunningham Lindsey UK's Major Loss Review 2006 detailed this very problem. John Firminger, specialist surveyor in the adjuster's Bristol specialist adjusting network office, wrote: "This has massive benefits in terms of cost and ease of installation and has significantly reduced the fire risk associated with plumbing work but the finished plumbing isn't necessarily as robust as its metal predecessors.

"Unlike traditional soldered joints, where a fault usually resulted in a gentle oozing of water or a steady drip, if plastic pipes are not properly secured, movement over time can result in these joints separating completely and the result is a sudden gush of water."

The example he gives illustrates this point all too starkly: "A five-storey block of flats was flooded with 700 litres of water a minute when a joint failed on a plastic pipe in the roof space. The water flowed through all the floors, causing damage to 30 flats, and the worst-affected tenants had to be moved into alternative accommodation. This increased costs by more than 50%."

Issues surrounding construction innovation do not stop with new materials and components. For example, insurers are seeing increased used of timber-frames - hardly a new material having been used in the UK for hundreds of years. But it is the way in which these materials are constructed that is causing concern.

Last July's fire at the 25-acre site of Beaufort Park in Colindale grabbed the headlines for this very reason. Although no factory-prepared pods were used, timber-frame construction was used on five or six storeys of flats above the ground floor, concrete, retail units. Block B4, where ignition occurred, collapsed nine minutes after the alarm was raised - with flames spreading to the two adjacent blocks and then to the Middlesex University halls of residence. Questions have since been raised over the suitability of timber-frame construction for high-rise buildings and it is understood that people who had bought the flats off-plan refused to honour their purchases unless design changes were made to the rebuild.

But other countries have a longer track record of using many of these innovative construction techniques - surely UK insurers could look to them for answers to their questions over resilience and repairability? "We have tried to get loss statistics from other countries but it has proved fairly difficult to obtain meaningful data - there are no statistics available in an easily digestible form," explains NU's Mr Smith.

Underlying causes of fire losses

From a commercial underwriting perspective, fire risk is undoubtedly one of the top concerns. Having seen commercial losses double to £900m in 2005 from £450m in 2004, while the number of fires remained static, a major Fire Protection Association research project has just been launched to try to identify the underlying causes. (Post, 1 March, p2)

Dr Jim Glockling, technical director of the FPA, told Post: "MMC is just one of many issues being witnessed by the insurance industry that could be skewing the whole basis of large losses with fire but there are many other potential factors including the more widespread use of fire engineering, the emergence of much larger buildings, and changes to the fire brigade's response under recent reforms."

"The problem is a lack of linkage between the statistics of the fire service and those of insurers," adds Dave Sibert, senior fire engineer at the FPA. "Currently, the Department for Communities and Local Government is patting itself on the back because the headline number of fires is reducing, and at the moment we can't demonstrate the impact in terms of increased size and cost."

Addressing this lack of evidence on the underlying causes of more severe fires will go a long way to either justifying or relieving insurers of their current concerns. And the insurance industry has already been instrumental in the creation of a new suite of certification standards for domestic dwellings - LPS 2020 - unveiled by BRE Certification last April (see box). This was intended to give insurers, mortgage lenders and regulators greater confidence in innovative systems.

Another certification standard - that of LPS 1501 - is also under development and should address key insurer concerns surrounding fire risk and performance requirements in commercial premises built using such modern methods.

So will these LPS standards help ease the anxiety of property underwriters?

"Definitely," says Groupama's Mr Smith. "These materials and construction techniques will then be certified to an acceptable level and insurers will accept those risks and avoid the ones that don't."

Tony Hutchins, commercial property manager at Allianz Cornhill, adds: "What we need is consistency and the development of these standards is the first step towards that. Hopefully they will have the effect of reducing losses and keeping premiums down."

Mr Gairns is also confident the LPS 2020 series will result in the creation of a much-needed MMC database. "It is currently very difficult to know where these properties are located - particularly with domestic buildings as it is rare to conduct surveys. It is also hard for a layman to look at their property and say 'that's MMC', so we have got to find a way to get that information for ourselves. If a database existed of all those that have been certified we would know these should perform and where they are. It is far better to know this fact up front than discover it years down the line when a problem or loss arises."

However, the FPA points to a few potential shortcomings of the LPS suite of standards, with testing geared towards brand new and 'whole' systems - rather than performance following holes being drilled into them or damage through wear and tear, in addition to a focus on desk-top review, rather than large-scale testing.

This is not to suggest the FPA does not welcome the new standards: "2020 has pulled all the stakeholders together and produced a document that says if a building passes all these standards then effectively anybody will insure it or lend money against it," says Mr Sibert. "However, as a result it is a bit of an unwieldy document - containing a great long list of British Standards that need to be met, plus desktop exercises that need to be carried out before it can be awarded."

Asked about these concerns, a spokesman for the BRE responds: "As you will see from LPS 2020, compliance with parts of it may involve testing of elements at large scale - for example, weather-tightness of external facades, and fire resistance of wall/floor elements - but it also includes other routes such as compliance with relevant British Standards and/or desk-based review." He confirms that the supporting 'enhanced' standards are at various stages of development with some set to be published within the next few months.

Learning from past mistakes

The insurance industry's anticipation of future problems arising from the growing use of MMC - even if they are currently not widespread - compares favourably with the way it responded to composite panel fire risks a few years ago. Arguably, on that occasion insurers reacted too late - applying massive premium hikes for affected premises or withdrawing cover - before work began on a new loss prevention standard, LPS 1181. This time the industry has acknowledged potential issues and is being proactive in investigating and trying to quantify its concerns early on.

And insurers are also willing to accept that the perceived risks with MMC may not be that bad. "It may well turn out that the answers are different to what we fear and that our concerns consequently do not have to be as big as they seem to be at the moment," says Mr Gairns.

Certainly, comments made by Richard Ogden, chairman of Buildoffsite, at the annual seminar of the Insurers' Fire Research Strategy Funding Scheme last month, suggest that some of the BI worries regarding commercial properties may prove to be unfounded. He demonstrated how easy it is to put a pre-engineered building in place by showing pictures of a McDonald's building that was under three metres of floodwater. Instead of electing to rebuild the premises, the decision was taken to replace it in its entirety - meaning the fast-food restaurant was operational in just 12 days. He suggested insurers "need to think more radically about the way buildings are procured" and said he wanted to "sow the seed in insurers' minds about the 'swopability' of commercial buildings".

But NU's Mr Smith would still like insurers to be consulted earlier in new building projects: "We are not there to create obstacles. All we want is buildings that are attractive to all stakeholders and to ensure the cost of insurance is affordable and reasonable for future occupants."

LPS 2020 - Standard for Innovative Systems, Elements and Components for Residential Buildings

The purpose of this suite of standards is to demonstrate that these systems have been subjected to rigorous independent review, testing and certification process; and to provide assurance to purchasers, insurers, lenders, designers and other stakeholders using innovative building methods, that they are at least equivalent to, if not better than, currently applied methods.

LPS 2020: For this standard, building systems, elements and components shall be required to meet the requirements of the UK Buildings Regulations for safety and functionality, a range of characteristics including durability, resilience, repairability, whole life performance, adaptability, and the provision of guidance on installation and maintenance.

The enhanced standards: LPS standards that specify performance requirements for systems, elements and components designed for performance beyond that specified in LPS 2020.

LPS 2023: Enhanced performance in fire.

LPS 2024: Enhanced energy performance.

LPS: 2025 Security performance of entry/egress into/from residential buildings.

LPS 2026: Flood resilience for use where residential buildings are to be constructed in areas where there is a material risk of flooding.

LPS 2027: Environmental profiling of building systems, elements and components.

Source: BRE Certification 2006.

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