U.S. Construction Insurance Market: Expect Higher Prices, Increased Scrutiny

As insurance prices rise and securing coverage is more challenging, contractors will need to reset their expectations.
By Sedat Kunt
July 7, 2021

From a shortage of skilled workers to supply chain disruptions to the spiraling cost of essential materials, construction companies face substantial pressures. These risks come at the same time as insurance prices are rising and securing coverage is more challenging, threatening the profitability, and even the viability, of certain projects.

Insurance pricing in the U.S. and globally, on average, has been increasing for several quarters. As insurers increase scrutiny on all applications—including extensions—companies in the construction industry are experiencing longer placement and renewal timelines and requests from underwriters for additional information.

Although overall insurance pricing increases moderated in the first quarter, challenging conditions are likely to continue through 2021, barring unforeseen changes. However, insurers remain keen to partner with contractors with a good risk profile, including a strong focus on contract risk allocation, worker safety and financial strength.

Stricter Terms, Reduced Limits

Increased insurance pricing is often accompanied by more difficult policy terms. In the current market, insurers are increasingly selective as to the risks they are willing to underwrite, with elevated scrutiny at times accompanied by a reduction in capacity. Extensions are becoming particularly challenging, a common trend during difficult market conditions.

The pandemic has exacerbated these challenges, with many projects requiring extra time to complete.

Most companies in the construction industry now face stricter terms and conditions, including reductions in limits of liability and increased retentions. Residential buildings, for example, are often seeing large increases in the water damage deductibles in builders’ risk policies.

Attachment points are also generally higher, requiring construction companies to retain more risk. Some insurers are reluctant to provide multiyear master builder’s risk programs, with insurers rarely willing to guarantee rates for more than 12 months. When coverage is offered, it is often subject to a review or break clause, with the program’s terms and conditions reevaluated after the first year.

As insurers offer less capacity for projects, effectively insuring one requires more markets to participate. This comes at a time when insurers’ internal underwriting approvals are taking longer, due to both increased scrutiny and elevated workloads. While capacity remains available, insurers are selective about the risks they are willing to take on, regularly asking questions and willing to walk away when they do not feel comfortable.

Pandemic Exacerbates Challenges

The COVID-19 pandemic complicated an already challenging market. Aside from changing work practices and contending with shortages and increased prices for essential supplies, new projects are typically facing exclusionary wording. Some insurers are seeking communicable disease exclusions on extensions, renewals and new business, although most carriers have said this is not meant to exclude physical damage to the site resulting from a communicable disease. An example is a crane operator who collapsed on the job and crashed a machine into a building.

The pandemic has underscored the vulnerability of the global supply chains that most construction companies depend on. Early in the pandemic, there was a slight pause in construction projects, leading to some delays. Once these challenges were addressed, construction companies faced a crucial bottleneck—the ability to source necessary supplies. Addressing this challenge requires communicating with subcontractors and suppliers, reimagining supply chains to minimize future disruptions and building resilience.

Technology Revolution

Tough competition for workers and new projects underscores the need to invest in technology. Companies that effectively use cloud-based software, integrated collaboration tools and mobile project management are typically at an advantage.
The proliferation of wearable devices, such as RFID vests and augmented reality hard hats, can enhance safety, quality and efficiency. Cutting-edge technology, including 3D printing, drones, robotics and other means of automation, continue to disrupt the industry.

The digital- and technology-enabled revolution is redefining the sector, reshaping business strategies and reimagining offerings. Companies that embrace technology tend to build smarter, faster and cheaper, while improved safety makes them employers of choice.

Potential New Spending Holds Promise

The Biden administration’s proposed infrastructure plan could lead to a significant number of new projects and increased construction spending. Despite uncertainty around the timing and final wording, the plan has changed the dialogue around infrastructure.

Taking advantage of new opportunities will require contractors to make needed investments, hire the right people and ensure they have appropriate insurance coverage.

Three Actions for More Effective Insurance Renewals

Changes in underwriting discipline pose challenges to insureds, who at times risk being unable to fulfill contractual obligations previously agreed on. However, there are a number of actions that insureds can take to alleviate the pressure, including:

  1. Establish clear objectives. Increased insurance prices and reduced capacity mean that construction companies have to be laser-focused on needed coverage. Ahead of underwriting meetings, insureds should work with their brokers to clearly outline program objectives and work to achieve their goals during discussions.
  2. Present data-centric submissions. Underwriters are seeking detailed risk data and generally are not willing to commit to a project before they have all required information. Insureds should work with their broker or insurance advisor to determine what information underwriters are likely to request and ensure the necessary data is available prior to meetings.
  3. Determine a plan to market the program. The difficult insurance market makes it increasingly likely that insureds will need to approach more than one carrier. Increased underwriter scrutiny and heightened internal controls are leading to longer timelines for both new project placements and renewals. It is paramount to make submissions early and allow ample time for insurers to ask additional questions.

The current challenges are unlikely to be resolved in the short term. For contractors, this new reality requires resetting expectations and understanding that programs that may have been commonplace a few years ago may no longer be achievable. This reality needs to be reflected in new construction contracts to minimize the risk of default.

by Sedat Kunt
Sedat Kunt is with Marsh’s U.S. Property Practice. Marsh is the world’s leading insurance broker and risk advisor.

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