The independent risk consultant’s view
Oliver Schofield is a Director at Lignum Risk Partners, a consultancy that provides business and risk management consultancy services to the broad UK construction market with a specific focus in the sustainable building sector.
Here is his thinking as to why now is the time for timber.
What is your background?
I have been in the alternative risk transfer and alternative financing industry since the mid-1980s. I specialise in putting together new capital solutions for hard to insure, or uninsurable risk exposures. I’m also interested in the whole timber space because we all have a responsibility, as businesses and individuals, to continue to reduce our carbon footprint and to drive towards net zero wherever we can.
What is the issue with the use of timber in construction on the UK?
The problem that we have in the UK is that there is insufficient knowledge when it comes to be able to price and underwrite the risk of timber in construction in the most appropriate manner.
Does the lack of data on timber performance restrict underwriting on timber construction projects?
No, it doesn’t. From the point of data and information there is a wealth of data all over the world where organisations have successfully used timber in construction for many, many decades. That data exists within architectural firms, within engineering firms, within overseas insurance and reinsurance firms; it exists in risk consultancy firms and in construction consultancy firms, so the data is there. The problem is that the data doesn’t relate to activity in the UK and trying to ensure that that data is transferred into a UK market environment, where underwriting can fully understand it and be able to therefore analyse it and price risk accordingly, has proved to be a major stumbling block.
Why is there a disparity in how the UK insures timber as opposed to other nations?
Part of it is due to the geographic differences that we see around the world. The risk exposures of timber building in warmer countries is going to be very different from the risk of exposure for timber building in different climates. Obviously in this country we have much more rain than in other locations and that can therefore cause problems with ingress of water. If you look at places like Australia, which typically doesn’t have as much rain as we would in the northern hemisphere, that risk is less pronounced. However, I think the other issue is that the typical model of underwriting is that data, when it is analysed, underwriters will try and analyse that from a position of, if that were to be in this country and therefore that data that we are gathering from other countries is less relevant to the activities that clients wish to undertake in the UK.
What needs to be done to increase the knowledge of timber performance?
There has been some detailed research undertaken by the large professional reinsurance market and they now have quite a useful databank of knowledge and information that they would like to be able to use to be able to provide solutions to the issue of using timber in construction in the UK. I think the second part of that is that we need to get the industry to come together to be able to share knowledge, share information, share data, share experiences so that from a pure UK perspective we can then really build that shared databank that everybody can access for the benefit of all and for the benefit of being able to push the use of timber in construction to a much higher level in this country.
Who will drive the need for the industry to come together?
I think the drive for getting the industry to work together lies at the endpoint and the endpoint is the increased use of timber in construction and therefore being able to achieve carbon net zero goals at different organisations have laid down for themselves. As we are all swimming in the same direction towards the ultimate goal, that should drive a desire for collaboration across the various strands of the overall industry. We should see the collaboration from the insurance markets, the financial markets, the reinsurance markets, which would also see collaboration from the developers, from the contractors, from the architects, the engineers, everybody involved in that space and certainly what we’ve been trying to do at Lignum Risk Partners for the last year or so is to start that conversation; to start that coming together, where people can share ideas in a very open way, but obviously having a certain amount of respect for confidentiality of their own businesses. Finding a common problem such as the unavailability of insurance for the use of timber in construction, we believe is going to help garner that effort, garner those organisations to come together to try and find a solution and therefore be willing to share their knowledge for the common good.
Can you give an overview of the Alternative Risk Transfer market?
Historically, the alternative financing market has been very supportive of industries that are facing problems when it comes to be able to find capacity at economically attractive prices and from a coverage perspective, broad enough cover for the exposures that they face. Examples that I’ve personally been involved in over many years have been putting together solutions for organisations that suddenly found themselves with very large asbestos exposures on their balance sheets. Now the traditional insurance market had drawn a line under renewing insurance policies with asbestos coverage, understandably so, but that doesn’t mean that that organisation suddenly no longer had that exposure. They needed to find a solution for that. There have also been some very noticeable examples where industry groups have come together to form a new capital solution. We’ve seen that in the North American railroads sector, we’ve seen that in the European pharmaceutical sector, we’ve seen it in the worldwide energy sector, so there are many examples where this has been successful and what we’re looking at is how can we build a new capital solution for the construction sector, specifically where they are using timber in their construction?
What is the difference between Alternative Risk Transfer and the traditional insurance market?
Typically, the alternative risk transfer and the alternative financing market are looking to support organisations, or industry groups, where there is an issue from the point of view of being able to provide capital, provide capacity, in the traditional methodology. We all know that there are many exposures that businesses face that cannot be classified as pure insurance risks and that is because the insurance market doesn’t see them as being risks that they can quantify, risks they can identify, risks they can then analyse and build a solution to. When we move into the professional reinsurance market and the financial markets, they are very keen to develop relationships with organisations who have identified and quantified those risks and are looking at a way of being able to finance those risks over a period of time. Now looking at what we were working on in the timber space, we are going to be partnering with private equity firms, capital markets, reinsurance markets, who can look at the industry and the good performance in the industry and see that actually what they are doing is for the benefit of the construction industry as a whole, but also the benefit for the climate as well and therefore they are prepared and interested to be able to use their capital to support that initiative, because they can have that relationship with the individual buyers to really get into the guts of what that organisation is doing and therefore have a much better view from what the potential for loss and potential for risk is.
What is the key to making this work for the timber market?
The exposures that businesses and industries face around the world are very challenging. The key to be able to find that new capital solution is being able to, first, fully understand what the drivers are for what that industry is looking to achieve in the short, medium and long term. Secondly, being able to understand what the risk exposures associated with those drivers are. Thirdly, being able to engage with the alternative financial market to encourage them to be able to use their capital to deploy for the creation of a new solution. These things take time. If they were readily available on the shelf, they wouldn’t be alternative, so we need time, we need consensus, we need that community of interest from various sources coming together to build that solution.
How far has your approach progressed?
We have been engaged by a group of large developers in UK to put together a feasibility study that will assess and analyse, first, the exposure those organisations face. Secondly, how they are going to drive towards carbon net zero by the increased use of timber in construction in the UK and thirdly to see whether there is a solution that can be delivered to them by accessing the alternative risk financing markets. We started that project and we are midway through it. We are engaging with those individual developers to understand fully what their demands, their needs, their blockers, their challenges are, so that we can build a solution that is appropriate for them around that.
How confident are you that we will see the increased use of mass timber in the UK?
If we start at the end of the process, which is finding a solution to enable those organisations to be able to increase the use of timber in their construction, then I’m very optimistic. We have had conversations over the last year or so with various capital providers who have all given us a very positive response to what we are trying to do, so I remain very optimistic about it. Putting aside all those outside influences such as the availability of capital, which we absolutely do believe is there. Ultimately, we all must work together to be able to find that solution to enable organisations to increase the use of timber. It is not a question of can we do this? It is the fact that we must do this.