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FOCUS ON CONSTRUCTION

FOCUS ON CONSTRUCTION

FOCUS ON CONSTRUCTION
January 30
10:25 2017

The construction industry has stabilized and is growing

All things considered, it’s been a good year for the construction insurance market. According to the latest Swiss Re Sigma report, global insurance and reinsurance losses in 2016 due to catastrophes and manmade events will likely cost $49 billion. While that’s a 33% increase over 2015, it still falls just below the 10-year average, says the Swiss Re data. An Aon Benfield report states that global catastrophe losses in 2015 were at a six-year low.

This reflects positively on the construction market, which is experiencing a stable and growing environment, according to the 2017 Marketplace Realities report by Willis Towers Watson. The company reported in its Spring 2016 update that construction activity in the United States grew through commercial and infrastructure projects, with pricing and capacity flat in most lines, and remaining competitive in the builders risk arena.

 Emerging trends

 Yet there are challenges. Tom Boudreau, head of The Hartford’s construction and energy profit centers, says that worker fatigue is an increasing trend in construction. “There are many reasons why the construction industry is experiencing more worker fatigue than in the past, but the mere shortage of labor has led to increasingly long work days and more ‘moonlighting,’” he says.

That can create quite an impact, Boudreau points out. “Accidents resulting from worker fatigue have and may continue to occur either on jobsites or while commuting to and from the sites, if more attention isn’t paid to the workers and their physical condition,” Boudreau says.

Not to mention the quality of the product. Boudreau says that a fatigued worker may produce work that is “inferior to that of a comparably skilled, rested worker. Utilizing fatigued workers can lead to either re-work or defect issues that may have a larger scale impact on an entire project.”

That shortage extends to experienced management as well, says Robert J. Brewer, vice president of industry solutions for The Hanover Insurance Group, Inc. Brewer sees an increase in inexperienced workers affecting residential buildings, commercial/institutional structures, and infrastructure improvements. “As the economic rebound continues, the impact of innovative building techniques and evolving materials will begin to reshape previous industry norms. These trends, along with ever changing insurance requirements from owners, make it challenging to manage construction projects if you do not have experience.”

Such a shortage could cause the build cost to increase and it could slow delivery, says Brewer. Plus, he says that jobsite safety could also be impacted. “This puts the challenge on contractors to enhance onboarding and skill development programs and to create incentives to keep their more experienced workers.”

Another construction-related challenge is the increase of broader design error coverage language, says Rich Soja, senior vice president of Inland Marine at Tokio Marine America.“‘LEG3,’ as it is called, is London-market design error wording that broadens coverage if a design error results in damage during construction. In recent years, there have been more requests to provide this extended coverage and the uncertainty of interpretation during future conflicts will cause challenges.”

Jobsite changes can also bring some unintended exposures. Pete Wilcox, national underwriting manager of Inland Marine, Travelers, says that building sites no longer have defined borders. Modular and prefabricated construction are bringing both efficiency and risk to the industry. With entire segments built offsite, however, the job has clearly changed. “Twenty years ago, plumbers were creating systems and bringing them to the job,” says Wilcox. “Today, they’re building the whole bathroom, walls and all, offsite and bringing it to the job as a complete unit. You’re seeing that in buildings that have a reoccurring look, such as student housing, hospitals, and hotels/motels.”

This type of construction can lead to better worker efficiency and quality control. “On the other hand,” he says, “these can increase the risk of loss. These construction activities are occurring outside of the construction site. As a result, the finished assembly has to be transported and stored at either the facility or at the construction site awaiting to be erected. Plus some of these units are odd-shaped, big and tough to handle. Because it’s modular, it has to be erected in a sequential order. So if something is damaged, the job is delayed.”

 Positive trends

 Still, the construction industry is seeing plenty of positive change, as well. Soja says historic preservation projects are increasing, and they bring with them some nice perks. “One of the advantages in historic preservation is programs offering tax credits. A 20% credit is available from the IRS if a property is certified historic. A 10% credit is available to non-historic properties if they are within historic districts,” he says. Direct physical loss to historic property may cause a loss of such tax credits, Soja adds, and those need to be properly addressed from an insurance perspective.

Another solid trend, Soja says, is the increased use of engineered wood in the U.S. market. “This material is generally easier to work with, lighter, fire resistant, earthquake resistant, and most cost-effective,” he says.

 Market considerations

 Increased use of engineered wood is an emerging trend that Sharon Primerano, chief underwriting officer for The Hartford’s marine practice, says has helped boost wood frame construction and has helped lower construction costs. “Capacity for wood frame projects continues to be available, with fewer market participants than projects of noncombustible or better construction,” she adds.

Primerano says the builders risk market remains competitive with “significant available capacity. Capacity for larger projects, in particular, has increased, with the only limitations being the natural catastrophe exposures of flood, earthquake and hurricane.”

She says customized coverage forms for builders risk are “prevalent for larger projects, with expanded coverage grants being offered in the traditional areas of transit and temporary storage, along with more property-oriented areas such as ordinance or law and utility service interruption.”

That abundance could continue. Competition in the construction insurance market is growing as new entrants come into the market, though Boudreau says their entry could be short-lived. “An increasingly aggressive market will make it tougher for some of these new entrants and others to achieve the returns necessary to remain committed to the construction industry long term.”

Still, Boudreau says, the market has ample capacity overall, with some regional exceptions where some carriers have imposed restrictions due to the jurisdiction/legal issues in those areas. “New York is an example of this, where higher deductible/retentions are prevalent, as well as higher rates.”

 Where opportunity is

 Despite regional capacity and pricing tightening, Brewer says insurers that are committed to the construction industry are creating coverage that will handle tougher regulations as the space evolves. “Some carriers have designated loss control specialists who help deliver important safety training to a contractor’s new employees,” he says. “This training may range from OSHA-required safety certifications to crane operation, all designed to help keep a contractor’s employees safe and productive.”

Brewer’s advice for the retail agent and broker community: “Embrace the space! There are great opportunities ahead for independent agents who specialize in construction. These agents know the coverage options, they know the industry, and are responsive to their clients’ needs. Partner with a carrier that has the products and services your contractors need to win the job, manage the risk, and keep their employees safe.

“And, of course, should an accident happen, pick a carrier that is ready to manage the loss to the best conclusion,” he adds.

 For more information:

 The Hanover Insurance Group

www.hanover.com

 The Hartford

www.thehartford.com

 Tokio Marine America

www.tokiomarine.us

 Travelers

www.travelers.com

The author

Lori Widmer is a Philadelphia-based writer and editor who specializes in insurance and risk management.

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