What does a hardening insurance market mean for construction, real estate?

Construction and real estate companies face massive risks and have significant property & casualty (P&C) insurance needs. These risks are growing in severity and frequency, creating a challenging environment for securing adequate insurance coverage at a reasonable rate.

In high-risk areas, commercial property insurance rates have spiked as much as 50% or more for certain classes of business. At the same time, insurance carriers are restricting terms and conditions, reducing limits and increasing deductibles.

This hardening insurance market is a headwind for construction and real estate companies looking to grow their operation and protect their balance sheets. Fortunately, finding the right solutions is still possible, but it requires new approaches and a full understanding of the changing dynamics.

To understand how to evaluate the protection this industry needs, it’s beneficial to start by breaking the coverage down into two parts: property and casualty.

Property insurance

Challenges 

The rise of catastrophic events has deeply impacted the construction and real estate industry. Hurricanes Maria, Irma and Harvey were significant events that really began to move the property insurance market. Floods, hail and tornado/wind events in non-traditional “catastrophic exposed” areas (namely the Southeast and Midwest), California wildfires and the increased frequency of attritional losses country-wide are major factors behind this hardening market.

These types of losses and the increased frequency and severity of claims that accompany them have sparked reactions by insurance carriers. Carriers are increasing rates and deductibles, reducing terms and conditions and expanding restrictions and policy exclusions. Others are exiting the market entirely, thus decreasing the supply of insurance coverage while demand continues to rise.

What companies can do

Before approaching the marketplace, every company should create a detailed underwriting submission to present to the carriers. These submissions should include specifics on how the company’s approach goes above and beyond to mitigate losses. Detailed and up-to-date construction, occupancy, protection and exposure (COPE) information is essential. For catastrophe-exposed properties, secondary characteristics like roof type and shape, type of exterior wall cladding, and hurricane protections should be included. No detail is too small.

A number of alternative deductible structures and funding mechanisms may also be worth considering. Large deductible aggregate programs with parameters around the types of claims that erode the aggregate can be a great solution. Deductible buy-down policies may also be utilized to address specific types of deductibles (named storm, earthquake, flood) as well as “all other peril” deductibles. For some organizations, a captive can be structured to fund deductibles in lieu of purchasing a separate deductible buy-down policy from the “traditional” insurance marketplace. Parametric insurance solutions that guarantee payouts for events if certain conditions are met (such as a Category 3 hurricane or an EF-3 tornado) are also gaining popularity among larger corporations.

Casualty coverage

Challenges

One major challenge construction and real estate companies face in the casualty market is centered on the contractor workforce. As the baby boomer generation continues to retire, they leave behind thousands of construction jobs that contractors need to fill. This shifting labor market is creating a talent gap with fewer younger workers available to replace more experienced workers. This trend not only places pressure on contractors seeking high-quality workers, but it also concerns insurance carriers that want to ensure a job is being performed as safely as possible.

The current legal environment is also placing pressure on companies and insurers. Many believe a phenomenon called “social inflation” is leading to much higher severity and ultimate payouts on casualty claims.

Similar to the property market, these challenges are causing casualty insurers to increase rates, restrict coverages and reduce excess capacity. Some are exiting the marketplace entirely, causing the supply of insurance coverage to drop. Submissions are also being highly scrutinized.

What companies can do

Construction and real estate companies should review their health and safety manuals and make necessary changes to improve worker safety and address potential liability grey areas. Companies should also take a close look at their downstream contracts (subcontractors, vendors, etc.), specifically the insurance and indemnification requirements. Clearly spell out the insurance that is required and the terms that must be included under each policy. Transfer what you can downstream, but be reasonable about it.

Think outside the box. An integrated excess program is an alternate way for any company to obtain additional excess limits. Large deductible and captive programs are also gaining popularity as a way for companies to tie their insurance costs more directly to their actual losses. These loss-sensitive plans have proven to reduce rate volatility.

A fresh perspective

With environmental, labor and legal liability risks on the rise, it has become essential for construction and real estate companies to secure comprehensive P&C insurance that won’t diminish their ROI on the project. Doing so has become slightly more challenging in today’s hardening market, but is still entirely possible. It just requires new ways of thinking and new approaches.

Related:

• Exposure-based training protects construction workers, company’s bottom line
• The most expensive construction accident cases of the 2000s
• The factors increasing engineering and construction claims

Matthew Smyth (msmyth@connerstrong.com) and Matt Walsh (mwalsh@connerstrong.com) are account executives in major accounts for Conner Strong & Buckelew. This article first appeared on the Conner Strong & Buckelew’s blog and is republished here with permission.