Why has the French construction class “dommages-ouvrage” blown a hole in CBL’s balance sheet and will other (re)insurers be affected?

Château de bugarach 2011

Listed New Zealand insurer CBL is the most prominent victim thus far of the controversial placement of long-tail liability French construction business into overseas MGA markets such as Gibraltar but - just like a shoddily built new house - the dripping tap and ceiling cracks could hide more serious problems.

Re-Insurance.com has tracked the recent litany of issues that have engulfed CBL, a specialist in construction insurance that is listed on both the New Zealand and Australian Stock Exchanges, which include a share trading suspension, an AM Best downgrade below A-, a NZ$100mn reserving charge and a block by the Irish regulator to write business through its European carrier.

And now - most notably - the insurer has placed itself into voluntary administration following a New Zealand high court order late last week that displaced the firm’s insurance boss as part of an interim liquidation. And since then the Irish regulator has sought to put the firm’s European operations into administration.

CBL’s disastrous Q1 2018 sprang from its writing of two related classes of French construction business - dommages ouvrage and decennial cover - through its relationship with the Gibraltar insurer-cum-MGA, Elite. The fronting carrier itself appears to be a victim of the class after going into run-off last year and then recently being acquired by legacy buyer, Armour Group.

So, how did a relatively obscure overseas markets become involved in writing such a technical class of business unique to France and will other carriers get caught in the net?

On the face of it, dommages-ouvrage (“insurance of the works”)  is an unlikely class to attract the likes of a CBL, a relatively small carrier 12,000 miles away from a French building site.

The cover itself is a mandated first-party ten-year protection for French homeowners and renters in new build or recently renovated properties and protects against defects or mishaps with fixtures and fittings.

So what’s the appeal for insurers?

Well, it’s an easy sell, because in theory it should be loss free. After paying the claim, the dommages ouvrage carrier has subrogation rights against those responsible for the building or fixtures.

Those contractors in turn buy decennial cover, a compulsory ten-year policy covering their handiwork against claims made by homeowners, renters or indeed their dommage ouvrage insurers.

Decennial policies are bought on an annual basis and protect the product of that tradesman’s work over the course of the next decade.

Theoretically anything that is covered by the dommages ouvrage policy will also be covered under the contractors’ decennial policy, almost like insurance and reinsurance.

It should see the dommages ouvrage insurer act more like a third-party administrator, or TPA, to pay claims as soon as they come in and then look to recoup the money from the decennial insurers.

But like in insurance and reinsurance, wordings aren’t always aligned which leads to disputes, which - in this case - leaves the dommages ouvrage carrier to foot the bill.

And also akin to the dynamic between insurers and their reinsurers documents can go missing, insurers can go bust and contractors’ names can be forgotten all of which can leave the dommage ouvrage insurer on the hook.

For this reason, the two products used to be sold in tandem by the likes of Axa, which dominates its home market in France. But then around a decade ago, Gibraltar’s Elite - formerly an unrated legal expenses MGA/insurer - moved in and, according to sources, began to undercut the local markets.

Eventually, the French financial regulator, ACPR, was lobbied to stir into action and in 2016 asked its Gibraltar equivalent, Gibraltar Financial Services Commission (GFSC), to scrutinise the level of reserving that was taking place with markets on the Rock such as Elite that were writing French inherent liability business.

This then led to an extraordinary early 2017 dispute between Elite and the GFSC as the MGA attempted to challenge the regulator’s interventions and was even successful in temporarily winning a confidentiality order to ban coverage of the proceedings. Ultimately, this ban was lifted and - after failing to raise sufficient capital to close a solvency shortfall -  Elite placed itself into run-off in July 2017.

But a year earlier - 2016 - more than 45 percent of CBL’s NZ$434.8mn of global gross written premium was written through Elite even though CBL said it was dialing back its exposure to the unrated carrier which retained only 20 percent of the risk on a quota share basis, ceding the majority to CBL.

CBL claimed in early 2017 that following the UK’s decision to leave the European Union, it was transitioning that business over to its now-banned European carrier, based in Ireland.

“Once completed, this strategy is expected to add considerable revenue and profit to [CBL Insurance Europe], which will continue to be supported and reinsured by CBL Insurance,” the insurer said.

“We wish to acknowledge the relationship with Elite Insurance, whom we have worked with since 2009, which has contributed to the building of a book now exceeding NZ$150mn, which has been written through, and shared with Elite over this time.”

But last month’s statement by CBL announcing its reserve charge confirms the damage had already been done.

“Of the approx. NZ$100m reserve adjustment, less than NZ$10m is in respect of the FY17 year,” CBL said, announcing the reserve deficiency on 5 February this year.

And there are still other parties that may be involved that have so far remained silent on the issue. Over 10 percent of CBL’s 2016 premiums were generated by another MGA/unrated insurer, the Danish-based Alpha.

Alpha’s website claims it writes approximately EUR200mn ($246.4mn), which would mean CBL booked around 15 percent of the MGA’s total premium.

But the chain doesn’t stop there. CBL also boasts 100 percent ownership of EISL or European Insurance Services Limited (EISL), which works exclusively in the French market providing construction liability cover.

EISL’s website lists partners including Alpha, AmTrust and Lloyd’s without detailing specific syndicates or explaining which carriers write what portion of the book, which includes surety cover that is not affected by the dommage ouvrage scandal.

CBL’s 2016 report revealed EISL had been through a “challenging year” yet managed to hold premium levels that were flat.

“In a tough market, EISL faced aggressive discounting and loose underwriting from two smaller competitors, putting pressure on its gross revenue of commissions and fees,” it said.

“One of those insurers has since ceased operations after it announced it could not comply with Solvency II. As a result, EISL is now gaining market share as builders seek higher quality products,” it went on.

CBL said the MGA had invested in a new senior management team, which it claimed was “more aggressively” seeking revenue growth.

Another MGA/insurer that wrote dommages ouvrage business is Gable insurance, the AIM-listed, Liechtenstein-based carrier that itself went into administration in 2016. Does this mean that CBL may not be the only reinsurer counting the cost of writing French construction through unrated markets outside of France?