While the construction sector has yet to hit the heights seen just before the Great Recession, it has seen significant growth over the last several years, with building permits in 2018 and 2019 moving toward a five-year high (sources- 1, 2). The construction industry is now home to more than 650,000 employers and over 6 million employees – generating almost $1 trillion in business each year (source). However, emerging trends such as large rate increases and reductions in excess capacity are posing challenges for construction insureds as the insurance market hardens.  An increase in high-value claim payments and settlements, labor shortages, and more careful deployment of underwriting capacity are all factors adding difficulty to the state of the market across the country.

Source

While the market is tightening everywhere, the coasts are experiencing harder markets than the Midwest. One of the main driving forces behind the market changes are large rate increases and reductions in excess limits. While it was possible to get a $75M tower put together with 3 or 4 carriers, it now takes 5 or 6 carriers, and each of those carriers requires more premium for less capacity. The New York area is seeing double- and triple-digit rate increases, with some construction companies now trading limits for premium (source).

Excess capacity has dropped in large part because more claims are going vertical, requiring carriers to pay for higher losses, especially in the areas of general liability and commercial auto. Many construction defect claims are moving into states that didn’t see them before, and action-over claims are carrying over to general liability policies in multiple states. Large losses in the construction property business, with a few exceeding $1 billion in costs, have caused some insurers to completely leave that market (source). As with markets across the country, claim settlements and law suit verdicts continue to rise in New York, with employee injury claims being a primary loss driver. Many insureds in this area are consolidating with other contractors or closing their doors due to difficulty affording insurance. The East Coast has also found that carriers are restricting the classes that they’re willing to write. Classes including demolition, structural concrete, structural steel, scaffolding, and foundation work are having extreme difficulty finding primary coverage and lead excess. Many carriers won’t touch these classes and those that will write the business, require 7-figure premiums. Such drastic market changes are forcing operations to seriously consider if they can afford to stay in business or obtain proper coverage.  

On the coasts, recent wildfires have driven many carriers out of the market because reinsurance has begun drying up. California’s 2018 Camp Fire, the most destructive wildfire in history, burned 6,700 structures while South Carolina wildfires burned 177 structures, with losses for these fires totaling around $7 billion (source). In 2018, hurricanes also significantly impacted the U.S. and Caribbean, resulting in approximately $100 billion in estimated losses and driving significant increases in reinsurance costs with prices going up an average of 10% - 30% for loss-affected accounts (source- 1, 2). Higher-risk coastal areas experiencing increased hurricane and catastrophic natural events or weather activity may now require greater creativity when it comes to underwriting (source).

Another tough coverage to place in the current construction market is commercial auto. Any contractor with a large auto fleet is being hit hard. Commercial auto pricing has been inadequate for several years, and, in addition, many carriers are now asking for $2 - $5M limits on underlying auto attachment points. CRC is often writing $1 - $2M auto buffers to help insureds get back into the standard market. When it comes to auto, an increase in claim activity with large payouts, is driving the market change.

 Source

The difficulty around insuring auto fleets is also due, at least in part, to a labor shortage in many places. Eighty percent of construction firms report difficulty filling hourly positions, which make up the majority of the construction industry’s workforce (source). The economy is doing well and the unemployment rate is low, leaving contractors to hire less experienced workers that can drive up Worker’s Compensation and auto claims (source). Some general liability carriers are pulling out of residential markets as less skilled work causes defect claims to surface (source). Wrap-up and project-specific markets are also getting tougher as carrier capacity dwindles (source).

While construction is innately risky – due to large-scale projects with multiple stakeholders, expensive equipment, and sometimes dangerous work – current trends are increasing the potential risk. A renewed demand for construction and the rising need for construction labor and materials can lead to higher insured losses. The cost of labor and materials is up 17-25%, which increases construction costs and the value of property claims. Rising healthcare costs also make the necessary Worker’s Compensation coverage more expensive (source). In addition, carriers are placing emphasis on site security and controls, requiring construction companies to spend more in the areas of safety and quality assurance (source).

Source 1, Source 2

In the past, many retailers and wholesalers could send in a submission and receive 2 or 3 quotes by the next day. Now, underwriters are being more selective, focusing on profitability as they face increased pressure from management and reinsurers (source). In this environment of increased scrutiny, it’s important for brokers to pre-qualify accounts and be prepared for underwriters that want to meet or talk to an insured to get a better understanding of the risk involved. Underwriters are looking for organizations that have buy-in from management for safety and controls, because they want to write for best-in-class operations. Underwriters also want to see stable companies with realistic, manageable growth projections.

As the market hardens, the quality of underwriting submissions and the relationships behind them will be key. Carriers now have 3 or 4 times the number of submissions that they did a few years ago and aren’t willing to waste time reviewing submissions that are incomplete or require them to ask additional questions. Carriers want to work with brokers they have history with – those with the experience and technical expertise to fully understand the insured’s potential risk (source). Also important in today’s market? Educating customers early and often about the market changes and managing their expectations around pricing.

BOTTOM LINE

The construction market is changing fast, and the potential impact on customers is significant. Wholesalers have the opportunity to play major roles with large construction firms because E&S allows brokers to be more creative, putting together solutions and adding coverage that the standard market can’t. It’s important to start the renewal process 60-90 days out and create submissions that clearly break down 5-10 years of loss history. Brokers and agents can also help create a better risk profile for underwriters by understanding and outlining the risk management programs insureds utilize (source).

As the market hardens, underwriters will continue to depend on strong relationships with wholesalers and retailers that have a reputation for understanding the risks involved and placing large volumes of business into the market. CRC is known as a dependable partner, specializing in the construction industry with a network of nationwide relationships that can help our retail clients access carriers and move their submissions to the top of the underwriting stack.

Contact your CRC Group producer to discuss how we can best help you serve your construction clients.

Contributors

• Andy Horan is an Inside Broker in the Woodland Hills, CA office specializing in the commercial construction sector and is a member of the Casualty Practice group.
• Jeff Dunn is a Senior Vice President and Broker managing a large book of commercial construction business out of CRC’s Atlanta office and is a member of the Casualty Practice group.
• Chad Propst serves as President of the Denver, Colorado office, handling a large portfolio of construction business across the country and is a member of the Casualty Practice group.
• Brian Fitzpatrick is a Broker in the Minneapolis office and member of the Casualty Practice group, responsible for handling commercial and residential E&S construction.
• John Engeldrum is a Senior Broker with CRC’s New York office and member of the Casualty Practice group, specializing in the New York construction market.
• Bob Greenebaum is Executive Vice President, Central Regional Director and National Casualty Practice Group Leader, located in CRC’s Chicago, IL office.