The market is stressed but stable after 15 tumultuous years
By Joseph S. Harrington
Over the past 15 years, the world’s economy has been battered by a global recession and a global pandemic, the latter coming just as the effects of the former finally receded.
No sector was more affected by those events than the construction sector in the United States, which nearly collapsed in the wake of rapidly falling real estate values after 2007, leading many experienced artisans and contractors to leave the business, never to return.
Then, as the sector slowly recovered, it was severely disrupted again by the COVID-19 pandemic, which interrupted many projects and complicated work on those that proceeded. Labor shortages and supply chain disruptions drove up costs and aggravated delays.
Experts described the pandemic-era construction insurance market as being in “a state of transition” from a decade-long softening of prices and underwriting criteria to a period of rising rates and intensified underwriting scrutiny.
Conditions have been little if at all better for construction insurers over the past several years. As they struggle to help their clients adapt, carriers have been reeling from soaring claims costs due to eye-popping jury verdicts and escalating costs of repair and reconstruction.
Contractors who deliver quality work with strong quality controls
and who execute on their safety programs will
be in the best position to succeed.”
Regional Vice President, Middle Market Construction
Despite claims inflation and volatility in the construction sector, conditions were generally favorable for insurers prior to the COVID-19 pandemic, according to Clare Wydeven, regional vice president of middle market construction at Nationwide.
“Before COVID-19, we saw improving results for all lines,” she says. “COVID-19 drove the change in profitability and availability. The pandemic contributed significantly to supply shortages, inflation in the cost of materials, and worker shortages.”
In response to rising claims costs, Sarah Wirtz, a senior vice president for RPS, finds that “our liability insurers are reducing capacity, restricting their terms, and putting sub-limits on coverages that were previously offered at full policy limits.” Wirtz serves as RPS’s casualty manager and environmental practice leader.
Wirtz’s colleague Michael Schafer, also an SVP and casualty broker for RPS, adds that the cumulative stresses over the past 15 years have led to increased costs and reduced availability of liability coverage. “Carriers have adapted by adjusting underwriting practices and offering specialized coverage solutions to address unique construction risks,” he says. “Risk transfer and allocation have shifted, placing more responsibility on contractors and subcontractors.”
In construction risk management, “safety is king,” says Wydeven, “but right behind that is contractual risk transfer.
“Now more than ever, contractors need to develop well-written agreements with their subcontractors,” she explains. “Most important, contractors need to have well-organized project files that include signed contracts, current certificates of insurance, and change orders.”
In some regions, general contractors are seeking higher limits than before on their subcontractors’ commercial general liability policies, according to Sarah Shine, senior vice president of commercial products for Erie Insurance. Shine says she’s also seeing more requests for older versions of standard additional insured endorsements, some of which grant broader coverage than their more recent equivalents.
As for construction property coverage, particularly builders risk insurance, Shine finds that there has been little change in the design of products or rating plans as insureds and insurers adapt to rising costs. “Rate levels and limits utilized have increased due to the rising cost of labor and materials,” she says. “Many of our clients have increased their deductibles and retentions to help offset the increasing cost of coverage.”
“Carriers have adapted by
adjusting underwriting practices and
offering specialized coverage solutions to address
unique construction risks.”
Senior Vice President and Casualty Broker
Shine also detects a reduction in reinsurance capacity for larger risks, especially for wood frame construction projects, the area of construction most acutely affected by increased losses and soaring costs.
For wood frame construction, “large fire losses, water damage claims, and hurricane events have caused a meteoric shift in rates, terms and conditions,” says Nicholas Cavaness, senior property broker for RPS. “The cost of coverage has more than doubled.
“While much of the increase is driven by loss experience on traditional construction, new methods such as modular construction, which can be prone to water damage, have put additional stress on loss ratios,” he says. “As a result, underwriting guidelines are being updated and new loss mitigation measures are being developed.”
In response to the increase in water damage claim frequency and severity in wood frame construction, Wydeven says that more insurers are adding separate water damage deductibles, requiring electronic monitoring of water leaks and humidity, and requiring a defined emergency response as a component of water loss mitigation measures.
Coping with the increased cost of coverage goes beyond the insurance transaction to project planning and design, according to Cavaness.
“Contractors are forced to keep a closer eye on the insurance market while developing budgets and designing projects,” he says. “The large shift in rates and security costs have caused pain in project development. Buyers have also likely found that the informational needs have increased substantially as underwriters perform more due diligence than they have in the past.”
Danielle Stewart, national head of wholesale distribution for Everest Insurance, sees a growing number of contractors seeking out project-specific and multi-project “wrap” coverage placements that are separate and distinct from their annual practice policies.
“Some large contractors and developers see this approach as a better way to control their insurance programs and bolster their responses to requests for proposals,” she says. “Among other things, this supports predictability and consistency in commitments to project sponsors.
“Initially, markets were skeptical of this approach, but at Everest we’ve found advantages to it while preserving the integrity of specific site underwriting.”
“Multi-project wrap-ups for apartment and commercial projects have been very rewarding,” adds John Fook, Everest’s head of construction and wholesale primary casualty. “They grant us more flexibility in crafting solutions and more consistency in our own pipeline and portfolio oversight.
“This approach allows us to understand the client’s coverage needs holistically, making our relationship more of a partnership than just a transactional offering.”
“Rate levels and limits utilized
have increased due to the rising cost
of labor and materials. Many of our clients have
increased their deductibles and retentions to help
offset the increasing cost of coverage.”
Senior Vice President, Commercial Products
Having seen the construction sector and construction insurance show resilience over a tumultuous 15-year period, construction risk professionals are confident for the future of both.
“I’m optimistic,” says Schafer. “There are obviously challenges in the near term, such as inflation, interest rate hikes, tightened credit conditions, and supply chain issues, but I believe the construction insurance market will continue to grow in the next few years. There’s infrastructure investment coming up, and many contractors have a large backlog of work.
“For there to be a stable market for both insureds and insurers alike we need effective risk management practices in place,” Schafer adds. “Insureds need to implement strong risk management strategies and carriers need to provide adequate coverage options at competitive pricing. We also need strong claims management.”
“We project growth in the construction market to continue,” says Shine. “Keeping up with rising construction costs will become increasingly important to maintain profitability and ensure long-term rate stability.”
“Even in the event of an economic downturn, buildings still need to be serviced and repaired,” says Wydeven. “Contractors who deliver quality work with strong quality controls and who execute on their safety programs will be in the best position to succeed.”
For more information:
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.