2024 Construction risk and insurance update
Opportunity knocks for construction-insurance professionals at the same time that longstanding headaches persist.
Although construction-business challenges persist, the sector’s insurers can look forward to increased profitability and rate stability in the near future, according to a May 2024 report from WTW.
Brian Cooper agrees. “The construction insurance market overall is in a stable position in terms of pricing and capacity,” says Cooper, senior managing director at Gallagher.
“Overall, losses have been managed, and a number of insurers have actually become more interested in the middle market segment of construction, which includes contractors with annual sales roughly in the $25 million to $100 million range.”
He notes that the middle market represents a significant segment of the larger construction industry.
Near-term, WTW researchers also see substantial, new coverage opportunities for construction insurance carriers, thanks to the burgeoning number of new infrastructure projects around the U.S. including new roads, bridges and airports, according to the report’s lead writer, Bill Creedon, global head of construction, WTW.
There is also likely to be more new business for construction insurers from other hot sectors within the economy such as semi-conductor chip plants, renewable energy facilities, electric-vehicle battery plants, data centers, distribution centers, and hospitals.
In fact, the price tags on most new semiconductor plant projects is so massive — multibillion outlays are now the rule rather than the exception — that construction insurance carriers have been able to offer relatively lower rates on such projects, WTW reports.
Meanwhile, construction industry insurers also can look forward to continued, robust opportunities in subcontractor default insurance (SDI), according to WTW researchers.
Specifically, the growing trend toward larger and more complex construction projects — including the building of new semiconductor plants — is enabling construction insurers to provide increased limits, proper terms and adequate coverage in SDI policies, according to WTW.
An uptick in subcontractor defaults also is driving demand for such construction policies. About 70% of survey respondents reported an increase in such defaults in 2023 as compared to the year prior, according to a 2024 survey from the Association of General Contractors.
Meanwhile, the WTW report points-up some low-hanging fruit for construction industry insurers willing to offer cybersecurity policies that include generous coverage for property damage. But many construction insurers are shying away from offering such coverage, despite the fact that comprehensive cybersecurity coverage remains a key pain point for construction companies.
That dearth in comprehensive cybersecurity coverage was echoed in a May 2024 survey of 500 general contractors and construction managers from QBE North America. QBE researchers found that cybersecurity protection is the top concern among general contractors and construction managers, with 42% reporting that such risk was highest on their radar.
Of course, along with the mostly blue sky forecast in new opportunities for insurers, there are a few clouds including challenges from labor shortages, increased claim costs, interest rate uncertainty and supply chain issues, according to the WTW report.
QBE researchers also picked up on the ongoing problem with labor, finding that 28% of general contractors and construction managers see a scarcity of qualified labor as their top challenge — especially when it comes to finding tradespeople specializing in electrical, HVAC and heavy construction.
That trend also popped up in AGC’s survey, which rated the lack of construction workers with advanced skills — or craftsmanship skills — as the construction industry’s number-one problem.
Nancy Germond, executive director, risk management and education, Independent Insurance Agents and Brokers of America, says her association is particularly concerned about labor when it comes to first-year construction workers.
Those inexperienced workers trigger more than half of all workers’ compensation claims, according to Germond. “Additionally, there are a growing number of class action suits for shoddy construction, which may be in part tied to a lack of skilled tradespeople,” she says.
Katie Rademacher is a commercial lines senior consulting underwriter at Westfield. She shares Germond’s concerns.
“An improperly trained workforce can result in workmanship impacts or increased workers compensation claims,” Rademacher says. “Increased claims lead to higher insurance costs, which are expenses that are added to a risk’s bottom line, resulting in higher costs to the consumer.”
In response, construction company owners are attempting to deal with labor woes by replacing human workers with technology such as drones, wearables, robotics and artificial intelligence.
Plus, they’re investing more heavily in training and development to ensure that all employees are equipped with the proper knowledge, resources, tools and techniques required to effectively deliver a defect-free project safely and on time, according to WTW researchers.
Even so, the paucity of quality labor has prompted many construction in insurers to require more data and insight from construction companies on their hiring procedures including how construction companies vet workers.
Simultaneously, equally worrisome to insurers looking at the near-term horizon is the continuing trend in skyrocketing claim costs.
Essentially: Insurers continue to see head-spinning, “nuclear” lawsuit judgments of $10 million-or-more coming down from the courts.
“Nuclear verdicts are the biggest threat to the contracting segment, because large settlements shrink our capacity and hinder our ability to grow our book,” says Teresa Cates, business segment director, EMC Insurance.
“For example, a $10 million settlement in Georgia would send shockwaves to all of our states, as we immediately would look to lower our severity. And that usually means taking a tougher stance on what limits of umbrella we want to offer.”
Nuclear verdicts represent the area most significantly impacting construction insurance, says Travis Pearson, CEO, CMR Risk & Insurance Services. “Insurers are simply unwilling to provide high umbrella or excess limits for many risks due to fear of nuclear verdicts,” he says.
Meanwhile, despite the fact that the supply chain breakdown triggered by the Coronavirus has eased significantly, construction industry insurers are still getting pushback from construction companies looking for better protection against such catastrophes, according to WTW researchers.
So far, many industry insurers are not in a rush to beef-up such coverage, unless insureds are willing to pay significantly higher rates in return.
“Supply chain issues hit the insurance industry hard during the pandemic recovery period, with construction material costs growing at an annual rate of more than 20%,” says Michael Teng, assistant vice president at Sentry Insurance.
While those spikes have subsided to a more moderate 4% — 5% annual increase, many construction industry insurers would do well to re-evaluate the related rates they offered before supply chain became an issue, Teng adds.
“Insurance policies written many years ago need to be reviewed to make sure property and equipment limits are adequate given the high inflation we’ve seen in the last three years,” Teng says.
Yet another factor creating a drag on construction industry insurers are stubbornly high interest rates, which many in the construction industry believe may persist indefinitely, according to WTW researchers.
Observes Tony Madden, assistant vice president, AmTrust E&S Insurance Services: “We probably won’t experience any relief in high interest rates this year.”
It was a worry echoed in QBE’s report, which found that 33% of general contractors and construction managers surveyed saw high interest rates as their top concern.
Craig Stokowski, commercial product manager, Country Financial, observes: “We see interest rate activity as the most significant driver in the near term for the construction segment.”
Small or artisan contractors in particular could be hit very hard by persistently high interest, resulting in fewer housing starts and fewer home remodeling contacts, Stokowski adds.
Construction Project Problems
The following five trends are responsible for an uptick in subcontractor defaults in 2024, according to the 2024 survey from the Association of General Contractors.
- Lack of skilled tradespeople.
- Design-related issues.
- Changes in insurance terms/costs.
- Project delays/cancelations.
- Changes in contract language.
Joe Dysart is an Internet speaker and business consultant based in New York City. He can be reached by sending an email to joe@breakingnewsintech.com.
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