Amid market opportunities, challenges exist
For the U.S. construction insurance market, 2017 was one damaging year.
According to Aon’s Construction Risk Outlook Report, 2017 natural disasters losses broke records—topping $132 billion in the states and $344 billion globally. Thanks to the costliest Atlantic hurricane season on record, nine of the ten losses registered impacted the United States.
But bright signs exist. According to the Insurance Information Institute, surplus stands at just under $720 billion. And a recent Associated General Contractors of America and Sage Construction and Real Estate survey shows that 75% of construction firms plan to hire this year.
Some observers note that, while U.S. storms cost the insurance industry $132 billion, most of that money drives additional construction spending. In a way, then, a bad storm year contributes to a good year for the construction industry.
An economy recovered
That could be in part due to an economy that has found stable ground since the 2008 recession. That is responsible for the recovery of the construction market, but, according to Gary Dunbar, divisional president of Great American’s bond division, the recovery is “concentrated in private commercial spending. Government spending has remained relatively stagnant.”
Robert Brewer, vice president of industry solutions at The Hanover Insurance Group, has not seen a recovery-related adverse spike in claims, but that could be due to diligence on the part of project owners. “We have not yet seen indications of the kind of increased accident frequency that typically presents itself when the construction economy booms. We attribute that to employers placing a heightened importance on worker safety and quality, utilizing more of the advanced techniques such as robotic automation and alternative construction methods such as offsite construction.”
Regionally, pockets of the country that were impacted by the downturn are seeing a resurgence, says Anthony DeCesare, executive general adjuster at Engle Martin. “Some regions typically remain unaffected by a downturn trend in the overall U.S. economy. With that said, the economic resurgence within the economy—with lower unemployment, an increase in jobs, expansion of business, and personal financial growth—is expected to create positive outlook for insurers. One would speculate positive premium growth and expansion moving forward.”
Greg Wetherwax, consulting underwriter for Westfield, says the economic rebound also signals the rebound of the construction market. “Building and infrastructure projects that were on hold for some time are now being completed,” he says. “Lending institutions, finance managers and private-public partnerships are more receptive to compete and finance these projects.”
That, Wetherwax says, is ushering in new growth opportunities for insurers. “Payrolls and subcontracting costs of the insured contractor are typically strong and trending up, creating premium growth within the construction sector. There is then a snowball effect. As the construction sector grows, so does the manufacturing sector, and this opens opportunity for the insurer to grow. Manufacturers with a direct relationship with the construction sector include those making steel beams, wood products, wiring, lighting, appliances, machinery and equipment, flooring, roofing material, brick, and hundreds of others.”
Trends and emerging issues
Despite rosy forecasts, the construction industry faces some very real challenges. In fact, some of the very things making the industry strong are things experts believe could adversely impact it. Becca Faust, executive vice president and production manager for commercial lines at USG Insurance Services says that, “While there are more tradespeople offering wider skill sets and services, specialist contractors are tougher to come by. As a result, skilled labor prices are increasing significantly. With increased material costs and the price of skilled labor, contractors are looking for alternative avenues for savings.”
Wetherwax agrees, citing several factors feeding the shortage, including retiring skilled workers and the unavailability of replacement workers. “Younger people seem to resist construction as a career option,” he says. That shortage, says Dunbar, limits the number of projects contractors can take on. Another concern putting pressure on contractors: the increased costs associated with recently imposed tariffs.
From a regulation standpoint, Dunbar believes immigration reform could provide an unwelcome labor market catalyst. “Immigration reform could exacerbate a critical shortage of qualified construction workers.”
That isn’t the only regulatory concern; in fact, numerous regulations seem to be pushing down on the construction industry. Wetherwax says the market could be additionally impacted by changes to safety regulations. “The industry is facing new or modified regulatory demands, such as increased OSHA penalties for unsafe workplaces, silica controls, and training,” says Wetherwax. “Also, regulations on minimum wage and fair pay for federal contractors, updated crane operator regulations, and unmanned aircraft or drone regulations.”
DeCesare sees other regulatory changes putting additional pressure on the construction market. For instance, the push to develop and construct smart buildings and use green products is making its way into state law books. “California recently approved a proposal to require solar panels on all new homes beginning in 2020. While California received all the publicity recently, other jurisdictions in the U.S. require them, as well,” he says.
While DeCesare believes these regulations will positively affect supplying alternative renewable energy options, such innovation increases an insurance company’s exposure. “Adding electric solar panels to a commercial or residential rooftop increases construction, maintenance, and repair costs, and creates additional risks underwriters should consider. From the insurance industry side, roof-mounted PV systems increase the risk of fire, whether the roofing material is fire retardant or not, and increases the cost to reconstruct the roof system following a loss.”
Yet some regulation is also needed, says Dunbar, to require surety bonds be placed on public private partnership (P3) projects. Those bonds, he explains, “protect the subs, suppliers and labor providers; and they assure delivery of an infrastructure project to the end users, the public.”
The construction market is responding to increased pressure from several sides by addressing cost and efficiency. “We are seeing modular and prefabrication construction becoming more popular,” says Faust. “Prefab is an alternate avenue providing a more cost-effective, energy-efficient option that keeps onsite construction costs down.”
Technology, too, is helping drive a better bottom line by improving efficiency. Faust says new technology is being used to improve risk management programs in the field.
For Wetherwax, technology-driven opportunities save time and improve budgets. “Use of unmanned aircraft (drones) provides access to remote locations to collect data, complete safety inspections, report project progress, and discover potential construction issues early in the construction phase. This saves time and can protect workers from potentially dangerous situations.”
But it goes even further. “Video recording of construction activities via fixed cameras or from drones is being used to better document the status of and disruptions to the progress of construction projects,” says Dunbar. Also, he says the use of three-dimensional design software is linking estimating departments, project management, architects and engineers, which improves overall outcomes. The result: Construction conflicts get resolved before ever reaching the construction site, Dunbar notes.
That sort of innovation, says Brewer, is where the real value lies. “Advancements in technology, such as robotic automation and the increased use of alternative construction methods, such as off-site construction, are being used to increase worker safety, increase productivity, and fill the gap in the skilled workforce.”
Coverage and claims
While the labor challenges are significant, they have yet to influence coverage. To the contrary, bolstered by a strong economy, surety writers are increasing capacity, says Dunbar. “Competition in surety is intensifying. There appears to be an abundance of construction work available, which creates a need for contractors to push their surety limits. Surety companies are typically stretching their underwriting standards to protect their best accounts.”
What claims are leading the way? Brewer says it’s the usual. “The most common construction-related injuries include slips, trips and falls that occur on the same level due to uneven surfaces or poor housekeeping. Injuries involving strains are also common when workers attempt to lift heavy or awkwardly shaped materials or perform repetitive work overhead where shoulders and the neck are under constant stress. In addition, elevated falls from ladders are common, with falls from heights continuing to be the main driver of fatal workplace injuries.”
Wetherwax says the current insurance environment is positive, which he says creates “a great opportunity for carriers to expand their contracting book.” But his words come with a caveat: “The underwriter needs to understand the unique exposures associated with contractors and have the discipline to structure an insurance program at rates adequate for the exposure. Some of these unique exposures include large contractor equipment schedules, potentially hazardous working conditions, heavy auto schedules, assuming third-party risk of others via subcontracting agreements/contracts, and financial/surety risk.”
Those exposures could be why there are few new players in the market, Wetherwax adds. “You either feel comfortable underwriting contractors or you don’t.”
Capacity, Wetherwax says, will vary by line of insurance, but in general, he sees plenty in the market.
Faust says she has not seen significant rate changes. Carriers, she says, are competing with coverage over price. “Many carriers are offering coverage enhancements and broadened definitions to provide a more comprehensive policy for the insured,” Faust says. “We are seeing more carriers offer coverages for contractual requirements—additional insured forms, waiver of subrogation forms, primary and non-contributory forms, per project aggregate—included. In prior years, these would be added at a significant cost to the insured. General liability policies are now being provided enhancement options for pollution coverage, cyber and data breach, installation floaters, and contractors tools. Certain classes can even obtain professional liability coverage on their general liability policy.”
Still, the industry has experienced some serious claim activity, which has caused other changes. According to DeCesare, “California wildfires led some building officials to expand their interpretations of existing building/energy codes; it costs more to comply during rebuilding. Nearly all jurisdictions countrywide now require environmental testing—lead, asbestos, etc., and this takes time to analyze, bid and complete the work.”
He sees also the impact of Hurricanes Harvey and Irma on the industry, which drove up the price of labor, materials and general contractors. “General contractors have been requesting a surcharge allowance, some as high as 25%.”
Tory Cirincione, commercial lines product development manager for Westfield, says that not understanding risk transfer is a common claim driver. “In construction agreements, the reality is that usually the party with the greater power (the general contractor) uses its position to transfer risk to a party in a subordinate position (the sub-contractor).
“The sub-contractor must understand their legal obligations when assuming the risk and determine whether they actually have the proper insurance coverages in place,” adds Cirincione. “One consequence of not doing so could cause them to be in breach of contract.”
Faust says that one significant industry challenge involves New York construction. “The Labor Law section 240/241, known as the ‘scaffold law’ imposes a strict liability on contractors and property owners. This law lets injured workers collect workers compensation benefits as well as litigate against other responsible parties. With absolute liability, common law of negligence does not apply. Since the plaintiff’s recovery is not reduced by their own negligence, labor law cases usually result in high awards and settlements.”
As a result, Faust says, “A limited number of carriers write construction in New York and insurance premiums are more than triple any other state. Without law reform, we do not expect to see new carriers entering the New York construction market or a change in rates.”
Advice for agents and brokers
Cirincione advises agents and brokers to get ahead of claims by understanding the risk appetite of carriers and by building strong relationships with them. By doing so, agents and brokers, he says, will “have a better understanding of how the particular claim department functions and will know what to expect should a particular claim issue arise.”
He also recommends keeping up with the construction market, particularly with changes in the laws of the states in which they operate. “Agents and brokers need to seek opportunities to educate themselves in construction risk management. By gaining expertise in the construction industry, agents and brokers will have a better understanding and recognition of the needs of their customers.”
Dunbar says agents and brokers can be the advocates their clients require to navigate a complicated construction market climate. “Agents must fully explain to clients the coverage of their bonds or policies. Agents need to encourage the cooperation of their clients with the surety claims department. Also, they need to help clients find and engage attorneys with significant surety knowledge and experience. They should view claims departments not as hurdles or impediments, but as opportunistic problem solvers.”
For Brewer, it’s all about onboarding and training. “Prevention is a critical aspect in addressing claims issues. Independent agents and carriers can play an important role in helping construction clients develop safety management plans aimed at preventing and handling claims.”
Likewise, brokers and agents should position themselves to be a large part of the claim process for their customers, says DeCesare. “This is a critical, time-consuming role, but the end result is usually highly beneficial to the process.” So is being the go-to source when customers need mitigation strategies, he adds. “Where we can preplan with the insureds, retail agents and brokers, it adds great value to the relationship.”
For more information:
Engle Martin & Associates
Great American Bond Division
The Hanover Insurance Group
USG Insurance Services
Westfield Insurance Company
Lori Widmer is a Philadelphia-based writer and editor who specializes in insurance and risk management.