The Insurance Market: What Contractors Can Expect in 2021

Due to increasing losses and poor investment returns, insurance rates for most lines are increasing, capacity is declining and underwriters are being selective on which accounts they will even consider.
By Jeffrey Cavignac
January 5, 2021

While some businesses and industries were impacted by COVID-19 more than others, all had to adapt. Fortunately, construction was considered an essential business in most jurisdictions, so for the most part the industry did well in 2020. As construction companies look to 2021, however, some are looking forward to a solid year given current backlogs, while others see their backlogs decreasing and are putting future projects on hold. This all factors into financial planning and budgeting—and a major expense item is insurance.

As if the challenges of the coronavirus were not enough, the insurance industry has also taken a turn for the worse. Although not across all lines, in general rates are trending up and, in some cases, trending up dramatically.

What Construction Companies Can Expect in 2021

Insurance rates have been flat or declining for years. Due to increasing losses and poor investment returns, rates for most lines of coverage are increasing, capacity is declining and underwriters are being more selective on which accounts they will even consider. Ballparking where rates will go in 2021 is at best an educated guess. Every account is underwritten individually and ultimately pricing will be affected by risk control strategies and loss histories.

Projected Rate Changes in 2021 by line of coverage

Commercial Property and Builders Risk are increasing, with property rates in general trending up moderately and certain builders’ risks going up dramatically. For example, appetite and capacity for Frame Builders Risk has declined significantly. Larger risks are generally shared by several insurers and deductibles are escalating as well. If a project is near a brush or forested area, the challenge will be greater, regardless of construction type. Guards, lighting and fencing are mandated by many insurers. On any proposed project, but especially frame projects, lock down pricing as early as possible.

General Liability rate increases are predicted to be modest. Most underwriters would like to get 5-15%, however this line remains fairly competitive for preferred risks and average rate increases should range from 0-10%. Don’t be surprised to see higher retentions. All endorsements need to be reviewed and understood.

Owner Controlled Insurance Programs/Contractor Controlled Insurance Programs (OCIPs and CCIPs). Experience in this line has been poor and capacity is shrinking while are increasing. This can be a significant chunk of a project’s construction budget. It is recommended that programs be negotiated as early as possible. The value of a well-prepared submission extolling the experience of the owner and the quality of the general contractor along with a narrative on the risk control and safety strategies is critical.

Contractors Professional and Pollution Liability (CPrL/CPL) remains competitive. Rates are generally flat to +10%. Recognize that all CPrL and CPL policies are manuscripted. There are no standard forms and coverage can vary dramatically from insurer to insurer.

Automobile remains a problem. Combined ratios (losses and expenses divided by premiums) have been over 100% for years and it doesn’t appear to be getting any better. Up until COVID-19, miles driven were increasing, which increases actual exposure. COVID-19 has reduced this exposure but it is viewed as a blip and not permanent. Loss frequency per miles driven continues to escalate due to a number of factors, primarily distracted driving. At the same time, severity is increasing. The cost to fix a late model car is more expensive today due to cameras and sensors, medical costs are increasing and social inflation is driving up jury awards. Auto in general will go up 15-20% in 2021.

Umbrella and Excess Liability pricing is increasing significantly and capacity is being cut. Average rate increases are 25% to 100%, but they may be higher. In addition, many underwriters are reducing the limits they are willing to offer. There are several reasons for this but the main one is increased jury awards, also known as social inflation. This has increased both the frequency and severity of excess claims. If renewing a significant excess tower, start early and seek commitments from the incumbent underwriters.

Workers Compensation remains competitive and on average, base rates shouldn’t change much and may actually decrease in some cases. Recognize, however, that each insurance company files base rates for every classification in every state they operate in. While some classes may go up, others will go down. How long Workers Compensation will remain competitive remains to be seen. In general, rates across the country have been declining since 2014. California, for example, has seen base rates drop 40%. This decrease in pricing has not been met with a similar decrease in losses and expenses and combined ratios are increasing which means profitability is declining. The impact of COVID related workers compensation claims has yet to factor in to Workers Compensation rates but that will happen in the near future. Rates should remain consistent in the first half of 2021, but are likely to start increasing in the latter half of 2021 or early 2022.

Directors & Officers Liability will increase due to the devastation of the economy and the poor results of many companies that has caused turmoil in the D&O marketplace, especially for publicly traded companies. Expect 15% to 40% increases for non-profits and privately held companies and 25$ to 100% for publicly traded companies.

Employment Practices Liability is also affected by the current economy. The sheer number of people that have and will lose their jobs is causing employment related claims to spike. Expect 10-50% increases along with increased retentions, especially in California.

Cyber Insurance remains competitive. While there is more claims activity, resultant premium increases have been fairly modest. Expect rate increases in the 5% to 20% range in 2021.

Surety Bonds are usually required of contractors performing public work and may be required on large private projects. Entering 2020, the overall surety market had been experiencing the longest expansionary period in history, resulting in relaxed underwriting guidelines, new surety companies entering the bonding arena and a significant surplus of credit. The impact of the current economic uncertainty has begun to surface. Construction and surety markets will continue to see signs of stress through 2021 and likely into 2022, underscoring the importance of prudent financial management and working with a specialist surety broker to negotiate favorable terms.

Health insurance increased an average of 4% in 2020. The impact of COVID-19 is yet to be known, but most carriers report lower annual claims as non-essential care was postponed during the pandemic. Claims costs will undoubtedly increase as that care is rescheduled. The 2020 election and Supreme Court confirmation could affect medical insurance in 2021 as well. Even if the Supreme Court rules the Affordable Care Act invalid, it will take years to unwind the ACA and start over, so this isn’t likely to impact health care in the short run.

For 2021, expect low single-digit rate increases and minimal plan changes. Rates for small employers (2-99 eligible employees) will be based on the employee and their dependents’ individual ages, plan design and location of the company. For employers with 100 plus employees, the rates are expected to increase between 5% to10%. Expect additional plan changes in 2021 that will remain compliant with ACA guidelines. For insurance carriers to be competitive in 2021, they will continue “Skinny Network” plans that offer a smaller number of providers at attractive pricing, but employees will have a limited choice of doctors. Ancillary (Dental, Life, Disability and Vision) and supplemental (Accident, Cancer, Hospital, etc.) improve employee satisfaction, which will help organizations hire and retain the best employees. Captives, self-funding and partially self-funded plans continue to be popular and could be a viable option for companies with more than 50 employees.

The commercial insurance industry is in a hard market cycle. Rates are going up, capacity is decreasing, more stringent terms are being imposed and underwriters are spending more time evaluating risks. In times like this, accounts are marketed more frequently and insurance companies will be inundated with submissions. Insurance companies value long-term relationships so price shoppers won’t get attention when they need it.

Handling Renewals

  • Align with the right broker. The broker should be the quarterback for insurance coverage, marketing efforts and risk control strategies.
  • Evaluate past marketing efforts and determine if it makes sense to obtain early terms from incumbent insurers or go out to market.
  • If going out to market, do it early.
  • Work with the broker to provide a complete submission that explains why the company is an excellent risk and worthy of the maximum credits that the underwriter has to give.
  • When evaluating an insurance company, consider the coverage offered, the company's claims handling reputation and the assistance they can provide from a risk control standpoint. Premiums are a key factor as well, but remember, “you generally get what you pay for.”

The “cost of risk” is one of a construction companies largest expense. In addition to the cost of insurance this includes money spent on deductibles, uninsured losses, safety programs, training and other expenses. While shopping around for the cheapest premium is one way to lower this expense, the only way to lower the cost in the long run is to lower the frequency and severity of the claims that drive the cost. Investments in risk control usually pay huge dividends!

by Jeffrey Cavignac

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