CONSTRUCTION INSURANCE
Demand is strong; supply, not so much
By Joseph S. Harrington, CPCU
“Not all that glitters is gold,” says Michael Pignataro, North American head of energy and construction for Allianz Global Corporate & Specialty.
“The construction insurance sector is hampered by the same human resource problems found in the construction sector itself. These include increased activity, an aging workforce, and insufficient replacement personnel.”
—Michael Pignataro
Head of Energy and Construction, North America
Allianz Global Corporate & Specialty
What’s glittering is the demand for construction work, which Pignataro says is “overwhelming” construction firms. Why isn’t that demand turning into gold? He cites two principal reasons: a persistent shortage of skilled labor and recent disruptions of supply chains.
“The result,” he adds, “is a construction market marked by reduced margins as contractors struggle to control costs.” He’s hardly alone in that estimation.
“Labor shortages are impacting revenue,” adds Lisa Wilson, construction and agriculture risk advisor for Bender Insurance Solutions. “One of our construction clients estimates its 2021 annual revenue to be down 25% from its recent average simply because they are unable to find enough labor to complete the jobs available to them.”
As for supply shortages, Wilson says some of her construction clients are putting more capital at risk by purchasing supplies immediately upon taking a new job, accepting early deliveries of materials at jobsites, and securing additional warehouse space to store surplus quantities. “These actions can tie up a firm’s cash and present greater risk if the project owner or general contractor defaults,” she says.
“As an unfortunate side-effect of supply chain issues and higher costs, we are observing increased thefts of tools and materials. To combat this risk, our construction clients are enhancing their jobsite and truck toolbox security protections.”
—Lisa Wilson
Construction and Agriculture Risk Advisor
Bender Insurance Solutions
In all, labor and supply shortages slowed growth in construction activity from the second to the third quarter of 2021, according to Angela Fylak, senior director for Nautilus Insurance Group. “While construction costs have actually declined recently, contractors are unable to find consistent labor or suppliers of materials in order to take on new jobs,” she says.
Tightening capacity
Conditions in construction insurance markets aren’t making things any easier for contractors. Current capacity for construction insurance coverage varies by sector and state, according to Fylak, but she detects an overall tightening in the market.
“While construction costs have actually declined recently, contractors are unable to find consistent labor or suppliers of materials in order to take on new jobs.”
—Angela Fylak
Senior Director
Nautilus Insurance Group
“Several carriers have restricted their construction appetite, taken significant rate increases, or pulled out completely,” she says. “Some are restricting their appetite for certain classes, with building envelope contractors finding options to be scarce, coverage to be narrow, and rate increases in the double digits.
“On average, we anticipate construction rates will increase between 5% and 15% for lower hazard operations, while operations with greater hazards or in states with difficult legal climates may see increases of 15% or more.”
Liability coverage for construction firms is complicated by increasingly stringent contractual conditions imposed on general contractors and subcontractors.
“We are seeing increased under-writing of contracts, subcontractor agreements, and accompanying insurance requirements,” says Wilson. “We’re seeing more challenging subcontractor warranties.”
According to Wilson, subcontractors are squeezed between demands from owners and general contractors for higher limits of excess liability coverage and the reluctance of insurers to provide them, and only at higher cost than previously.
Auto and wildfire
Add commercial auto exposures and—well, the challenge grows. More and more, auto exposures for construction accounts, if they cannot be packaged with other lines, are facing limited options in the monoline market, Wilson finds. “Carriers continue to shift their appetite in this space and restrict or eliminate previously eligible risks,” she says. “The umbrella/excess market is especially challenging for construction clients with heavier fleets or auto claims.”
Catastrophic wildfires in recent years are also complicating the market for construction coverage.
“Property and inland marine clients in fire-prone areas are seeing more declinations, higher rates, wildfire exclusions, and high wildfire deductibles,” she says. “In addition, some general and excess liability carriers are adding wildfire exclusions.”
Regarding builders risk coverage, Pignataro says that cumulative market capacity is relatively unchanged but has shifted considerably in how it is deployed. Where a single carrier might have written an account or project in the past, Pignataro now finds more carriers adopting what he calls a “ground-up, quota-share approach,” which often requires several carriers to complete a placement.
“In general, pricing and deductibles have increased,” he says, “in particular, deductibles applicable to water damage, the primary claims driver on many placements.”
Underinsurance issues
The increased demand for construction along with labor shortages and supply shortfalls have resulted in numerous reports of policyholders finding themselves underinsured for building property losses.
“Inflation impacting construction suppliers has led to concerns over underinsurance,” says Fylak. “Agents and brokers should continually re-evaluate building limits to ensure proper building limits are provided. At the same time, construction risk managers should ensure they are accurately projecting the value of their operations to avoid large premium audit payments.”
Inflation is a key concern for carriers like Allianz that underwrite large projects, says Pignataro, primarily to ensure that their own rating and deductible levels are adequate. He says Allianz seeks to protect its insured property owners from unpleasant surprises by forgoing coinsurance requirements and providing “ample” cost escalation clauses. “Due to these enhancements, our policies are customarily auditable upon completion, and generally prevent cases of underinsurance,” he says.
Inflation doesn’t just affect the cost of construction; it also affects risk to the means of doing the work itself.
“As an unfortunate side-effect of supply chain issues and higher costs, we are observing increased thefts of tools and materials,” says Wilson. “To combat this risk, our construction clients are enhancing their jobsite and truck toolbox security protections. They are adding physical barriers to access, attaching GPS devices for geo fencing and tracking, installing better alarms, and increasing their use of cameras on jobsites.”
Challenges
“Our construction clients are busier than ever managing increased regulatory burdens along with labor shortages and supply chain uncertainty,” Wilson says. “This dynamic environment presents our greatest challenge but also our greatest opportunity to make a positive impact by educating our clients and the larger community on key risks and solutions.”
According to Fylak, several former “go-to” markets for construction coverage are no longer around or not offering competitive terms on renewals. In light of that, she says, “agents and brokers will need to make new relation-ships and find new solutions. The greatest opportunities will be for agents and brokers who anticipate the market and get out in front of their renewals quickly.”
Construction risk professionals can certainly empathize with their clients in one respect, as both parties share a major challenge in attracting and retaining talent.
“The construction insurance sector is hampered by the same human resource problems found in the construction sector itself,” says Pignataro. “These include increased activity, an aging workforce, and insufficient replacement personnel.
“Insurance professionals knowledgeable in property, liability, and specialty coverage are already in short supply,” he says. “The need for specialized construction experience only exacerbates the problem.”
Clearly, demand is there in construction. Can we address the supply?
For more information:
Allianz Global Corporate & Specialty
www.agcs.allianz.com
Bender Insurance Solutions
www.mybendersolutions.com
Nautilus Insurance Group
www.nautilusinsgroup.com
The author
Joseph S. Harrington, CPCU, is an independent business writer specializing in property and casualty insurance coverages and operations. For 21 years, Joe was the communications director for the American Association of Insurance Services (AAIS), a P-C advisory organization. Prior to that, Joe worked in journalism and as a reporter and editor in financial services.
