What do the rising costs of materials and energy mean for Builders Merchants insurance?

As widely publicised, the UK economy is battling some significant headwinds and many businesses across the country are facing a perfect storm of rising interest rates, wage inflation due to increased competition for talent (coupled with a cost-of-living crisis), and levels of inflation not seen for over 40 years. This is being specifically felt in the construction industry with scarcity of materials and dramatically increasing fuel and energy prices impacting on margins. All of this will be acutely felt by builders’ merchants and suppliers.

In this blog, we explore why the costs are rising, how it affects insurance premiums, and how your business can keep costs down during the economic crisis.

How much has the price of materials risen?

In August 2022, the Builders Merchant Federation (BMF) released a report finding:

• Prices have risen by 10% to 15% in the last year for construction materials and product
• The cost of timber has increased by 50%
• OSB and similar sheet material costs have risen by 100%

Why have materials increased in price?

The prices of materials are increasing for a few key reasons.

1. COVID-19
   When the world went into lockdown, it had a devastating impact on the construction industry and many building projects were postponed. These projects were re-scheduled following the series of lockdowns but due to so many projects happening at the same time, prices rose as the demand for materials was far higher than it had been prior to the pandemic.
   
   
2. Brexit
   Brexit has also led to significant price increases to materials because there are more customs areas to go through. Though a large proportion of construction materials are manufactured in the UK, prior to Brexit, 60% of imported materials came from the EU. This means that the construction industry has had to now rely far more heavily on domestic products and with a finite capacity this surge in demand has resulted in price increases and inevitable delays.
   
   

3. The Russia-Ukraine war
   Perhaps the current most significant impact on rising costs is the war in Ukraine. Although, according to the CLC in a report from March 2022, the UK only resourced 2% of materials from Ukraine, Russia, and Belarus, but they were often critical materials such as bitumen, cast iron products, rebar, and timber. Added to which the conflict has affected global logistics and shipping and also led to an increase in fuel costs. Naturally this has a big impact on construction in the UK.
   
   However, the more painful aspect comes from the cost of energy, with the war affecting wholesale energy prices in the UK due to supply constraints from the European energy market. This directly influences the manufacturing of steel, cement, bricks and blocks, and glass, with the cost of energy increasing the cost of these materials. In particular, this increase is seen most clearly in fabricated structural steel, rising 128.6% since 2015 [stats correct as of September 2022].
   
   
4. Inflation rates
   Finally, these factors coupled with economic headwinds and fiscal policy changes has resulted in an increase of inflation, with it rising at its fastest rate for over 30 years and currently standing at 11.1% (Oct 2022).

How will the rising cost of materials affect my insurance premiums?

The higher costs of materials can lead to your buildings contents and stock sums insured being insufficient and as a result your business interruption cover being inadequately placed. A full timber store is now potentially 50% more valuable than it was two years ago.

Let’s use an example.

There is a fire at your premises which spreads to your wooden materials and they are completely destroyed. You submit a claim under your material damage or business interruption insurance and your insurers assess that the value of the lost materials should be valued at £500k, while your current sum insured is £250k. As a result, the insurer proportionally discounts the settlement by the extent of under insurance (50%) and offers a settlement figure of £125k. Leaving your business with a balance sheet loss of £375k

Higher stock values will also impact your goods-in-transit insurance and crime/fidelity insurance, as your stock becomes a more attractive to thieves.

This highlights why it is essential to be proactive in your approach to insurance and the importance of working closely with your insurance broker to ensure your business has the appropriate level of cover in place.

How could the rising cost of energy affect my insurance premiums?

The rising cost of energy will inevitably impact the running costs of your business and likely impacting the prices charged to customers. This impact will have an effect on the level of insurance purchased and should be considered carefully. Inevitably the rising cost of energy and fuel will result in increased purchase costs and potentially result in an increased turnover for your business. But it is questionable as to whether this would translate as an increase in profit as some/all the increased costs are passed on to customers, where possible. This is important for every business to assess, as these changes need to be correctly considered when selecting the how the business interruption insurance is arranged, both in terms of the basis of this essential cover, and the limit and indemnity periods selected. Crucially these rising costs will result in the business thoroughly evaluating and revisiting the business continuity and disaster recovery plans.

How do I make sure my business has the appropriate level of cover in place?

You should work closely with your insurance broker throughout the year advising them of changes, and ideally have a quarterly review/update. You should also conduct a thorough review of your insurance programme every year in advance of renewal to ensure your business is appropriately protected. This may not necessarily involve obtaining alternative quotations as it is generally not advisable to do so annually, but should involve a thorough review to ensure that the cover you have is fit for purpose and is up to date with your business as at today and for the forthcoming year. As always, if anything changes during your insurance period, you should let your broker know without delay.

Is there anything else I can do to help keep costs down?

Here are a few tips from our specialists:

• Defer to the experts - the insurance space can be complicated, so working with an insurance broker that specialises in your sector can be hugely beneficial
• Review your approach to risk management to ensure that it is representative of your business as at today, efforts to improve your business’s risk profile will be welcomed by insurers and the better your risk profile, the more chance your insurance broker has of negotiating a lower insurance premium
• Don’t shop around too much during your renewal period. There is a finite market of solvent secure and suitable insurance companies and multiple requests from brokers and on-line aggregators can affect an underwriter’s willingness to offer terms making it harder for any insurance broker to secure quotes

We are here to help

The economic crisis will be a hugely tempestuous time for businesses. It is therefore important to secure the support of an insurance broker that understands your business/industry and who will support your business all year round, not just in the lead up to renewal. Click here to read our recent guide on how your broker should support your business.

For more information or to arrange an unbiased confidential review with one of our specialists request a callback.