Specialty Lines Markets

CONSTRUCTION INSURANCE

Contractors and insurers are eager for project funds and workers to show up

By Joseph S. Harrington, CPCU

As the U.S. awaits the enactment and implementation of a major federal infrastructure bill, there’s a question whether conditions in the domestic construction industry will prevent contractors from fully benefitting from the flow of federal dollars.

Contractors lament the persistent lack of skilled, experienced artisans, many of whom left the industry following the real estate collapse of 2007. It’s not just a matter of fewer hands to do the work; it’s a lack of seasoned leaders to serve as guides and mentors to newcomers on jobsites.

For insurers that underwrite construction work, labor shortages don’t simply reduce the volume of insurable work; they add risk for worker injuries, project delays, property damage, and other losses.

Another short-term constraint on construction is price hikes for certain materials, notably lumber, which spiked in cost in the early spring before falling again in June.

“Production plants that were shut down because of COVID-19 now have to ramp up production,” says Kevin McCann, vice president and chief contract officer for surety at Philadelphia Insurance Companies. “We hear it every day from our clients: Labor and materials are the big issues.

“A lot of projects were shelved during 2020 due to lack of state revenues,” he adds, predicting only “little spurts” of work “until the money starts flowing. Construction funding has to make its way to actual projects.”

Liability coverage

When public money for projects starts flowing, contractors will find a market for general liability that is starting to harden, but manageable for sound accounts.

“General liability coverage for construction firms remains competitive for accounts that are loss-free or close to it,” says Jett Abramson, national construction practice leader for Amwins Brokerage. “For loss-challenged accounts, we’re seeing less underwriter willingness to take risk than we’d historically see.

“While the primary market remains reasonably competitive, the market for wrap-up programs has hardened dramatically in the past 18 months, along with excess casualty across the board.”

According to Preston Starr, partner and managing executive of C&S Specialty Underwriters, “Conditions right now are hardening” in the market for construction liability coverage, with renewal rates increasing 8% to 12%. “In terms of coverage, the market is relatively stable,” he adds. “We are not seeing carriers throwing in the kitchen sink like we did in prior years, but they are also not being very restrictive with coverage.”

Coverage limits are another matter. “Limit capacity is definitely tightening,” Starr says. In particular, “excess liability markets are pulling back substantially on the limits they are willing to provide, and price increases in the excess market are firmly in the double digits.”

First-party property

Like the market for liability coverage, the market for first-party construction property insurance appears to be tightening but not distressed.

Armando Zazueta, who oversees engineering risks in the Americas for Swiss Re, says that writers of builders risk and other inland marine construction classes are adjusting to challenging conditions in the wake of a decline in construction activity in 2020.

“Carriers are balancing their portfolios with rate increases and underwriting discipline,” he says. “They are refining their risk appetites, tightening terms and conditions, and letting go of underperforming portfolios.

“We see our client insurers being more selective about the projects they put on their balance sheets and much more conscious about accumulation to exposure for losses from natural catastrophes,” Zazueta adds. “They are also doing more extensive underwriting of secondary perils such as brushfires, hail, and convective storms.”

Among the more recent trends in inland marine construction coverage is the occurrence of natural disaster losses to extensive schedules of contractors’ equipment. In response to that, Zazueta sees “an incremental withdrawal of capacity and steeper rate increases to more sustainable levels.”

Pandemic complications

The COVID-19 pandemic has had a profound impact across the entire construction supply chain, according to Zazueta.

“Contractors struggled with the slow economy, the search for alternative sources of materials, project delays and cancellations, and labor issues in finding and retaining quality workers,” he says. “At the same time, insurers have had limited access to project sites, preventing them from being closer to the project and from providing risk management recommendations.”

“Project delays due to COVID-19have had a major impact on our clients,” says Abramson. “Along with others in the industry, our clients have had to navigate slowdowns on existing projects and push back start dates on new ones. These pandemic-induced delays created challenges the construction industry has not had to handle on such a large scale before.”

Even when the work was there, the supplies and materials often weren’t. Starr counts a number of artisans and small contractors among his clients, and says that “residential remodeling jobs increased significantly” as families were locked down. However, pandemic-related disruptions to supply chains slowed deliveries of essential materials.

“So, while our insureds were booking lots of work, it was taking much longer than usual to start and finish those projects, as it would take six to 12 months at times to secure building materials,” Starr says.

Client challenges

While there is still plenty of capacity and appetite for risk among construction insurance carriers, even a modestly hardening market is another burden for contractors struggling to secure labor and materials.

The construction insurance market is not “rock hard,” Starr says, but both buyers and providers have not experienced a sustained hardening since the early 2000s. In contrast to previous cycles, he finds there is no relief to buyers from “inexperienced markets cutting short prudent underwriting.”

For his part, Zazueta says there are newly emerging opportunities for insurers, producers, and clients in construction trends, including modular construction, the use of automated sensors to track projects in real time, and the development of parametric risk contracts to provide funds quickly and thereby reduce weather delays.

“One of the largest challenges is managing client expectations in a hardening market,” says Abramson. “Brokers can no longer promise reduced pricing to win accounts with the expectation that they can deliver by pressuring underwriters after the fact.

“Brokers with established client relationships that allow for open and honest conversations about market conditions appear to be the most successful in this current market cycle,” he continues. “Many brokers have become complacent in securing favorable renewal terms for the past decade, but the current marketplace does not reward complacency.

“The greatest current opportunity is a broker’s willingness to perform hard work,” Abramson concludes.

For more information:

Amwins Brokerage

www.amwins.com

C&S Specialty Underwriters

www.csunderwriters.com

Philadelphia Insurance Companies

www.phly.com

Swiss Re

www.swissre.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.