Inflation, labor challenges are the biggest risks facing construction sector
Since 2012, the growth rate of skilled craftspeople entering the workforce has slowed, with certain sectors such as carpentry seeing declines.
Inflation’s impact on materials and labor challenges continue to be the biggest operational risks facing the construction sector, according to Selective Insurance’s General Contractor Risk report.
“Construction is an inherently high-risk industry given its exposure to and reliance on macroeconomic factors, such as commodity pricing, supply chain, labor dynamics, and housing demand,” Jim Albi, assistant vice president, contractors, at Selective Insurance, said in a release. “For general contractors, their ability to identify, anticipate and manage a range of workplace risks can determine the success of their projects and, more importantly, their business resiliency.”
In June 2022, general inflation reached a high of 9.1% and the producer price index for the construction industry peaked a month earlier at nearly 9.5%.
According to Selective Insurance, higher material costs tend to result in builder risk policyholders seeking higher limits. In 2022, the number of builder risk policies by Selective Insurance with coverage limits of $2.5 million and higher increased 23%.
However, inflation declined through the latter half of 2022, but remained and economists project construction material prices to stabilize near historic norms through 2023.
Selective Insurance’s report noted the issue most often discussed with general contractors is the challenge of finding qualified, skilled workers. Since 2012, the growth rate of skilled craftspeople entering the workforce has slowed, with certain sectors such as carpentry seeing declines.
Darren Tasker, North American head of energy & construction for Allianz Global Corporate & Specialty (AGCS), confirmed this, explaining the fight for skilled labor among a dwindling pool of skilled laborers is one of the carrier’s biggest concerns.
With fewer skilled workers to select from, contractors have turned to inexperienced employees to fill vacancies for more advanced roles. Selective Insurance noted that in addition to being less inefficient, putting recent hires in advanced positions can result in higher workers’ compensation claims.
“No matter what the loss scenario is, nine times out of 10, unless it is related to a NAT CAT, it usually comes down to some sort of operator error,” Tasker said. “So certainly the lack of talent is concerning as it could lead to more losses because of operator error.”
AGCS takes these factors into account during underwriting, making it critical that the carrier’s team obtains first-hand knowledge of a builder’s risks.
“It is another reason we like to get out on site and do visits and surveys. We can see boots on the ground and the dynamics at play,” Tasker said. “It gives us a comfort level to see how the client is managing front-line workers.”
Selective Insurance reported some contractors are turning to technology, such as robots for materials handling and project management mobile apps, to reduce labor scarcity pressures.
On the claims side, Tasker noted technology is also being leveraged to prevent losses and, more importantly, minimize damage when a loss does occur.
With water damage continuing to be the biggest loss driver in construction, water leak detection systems are being deployed more frequently, Tasker gave as an example.
“That technology doesn’t prevent water damage, but it minimizes it by shutting it off much quicker than relying on a human to notice that there is water leaking somewhere and responding,” he said.
Some insurers are partnering with providers of water detection systems, and offering differential terms based on if the technology is installed or not, according to Tasker.
“If a client wants a lower deductible, perhaps an underwriter and insurer can agree on a lower deductible if this technology is installed on a project,” he told PropertyCasualty360.com.
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