Insurance Update: Q4 2021

The construction insurance market continues to evolve. With uncertainty and anticipation in the air within the insurance world, it is an auspicious time for a market update. The construction industry has combated several challenges over the past few years: COVID-19, labor shortages, project interruptions, volatile payroll and revenue and rising cost of materials. The hard market over the past few years has forced insureds to become acclimated to underwriting surprises. Carriers continue to face new emerging risk and pay out large losses; however, it seems they are comfortable and competitive in certain corners of the construction insurance industry. It’s still expected that rates will increase across the board through the end of the year, but overall, it seems the construction insurance market is starting to see rates moderate, with leveling in the forecast.

Primary casualty lines continue to see slight rate increases in the 5% to 10% range, depending on loss history and operations. Workers’ compensation continues to be competitive, while umbrella and excess lines are still throwing punches. The excess market is still experiencing an upward pressure on rates as carriers continue to tighten capacity.

Underwriters for both primary and excess liability are differentiating their positions by providing a lead umbrella above their own primary lines. Typically, this provides some competitive advantage, but not in all cases. Underwriters in the excess market are reducing their capacity deployed, as much as 60% or more, while maintaining pricing levels for lower limits. Expect rates to move up as well as the attachment points above general liability and auto liability, depending on operations, states and fleet count.

Liability Insurance

General liability and auto liability lines are continuing to see rate increases, but they are starting to flatten. Competitive renewals around contractors who are starting their renewal process sooner are more common, providing more detailed information to underwriters, cultivating strong safety programs and showing low loss experience.

Construction professional liability and contractor’s pollution liability lines continue to be competitive compared to other property and casualty lines. Rates through 2021 are expected to remain flat with some increases in the 5% to 10% range, once again depending on loss history and the nature of the contractor’s operations.

This market continues to expand with new coverages and new carriers providing capacity, which is mitigating rate fluctuation. Higher coverage limits are being required on contracts for public and private projects.

Biggest Insurance Risks of 2021

The most extreme rate increases are in the standalone projects with catastrophic event property deductible (CAT) exposure, and wood frame projects continue to be a restricted market at much higher rates. Water damage and arson claims have been more prevalent and are putting upward pressure on rates, while forcing insureds to take higher deductibles. Another noticeable trend is the increase in quota share on layers; it’s taking two to three times the amount of carriers to provide ample capacity for total insurable values for projects.

The builder’s risk market has been, for lack of a better word, inconsistent. Overall capacity remains plentiful with no expected shrinking in the short term. Project-specific builder’s risk should continue to expect rates to increase 5% to 10%, while master builders’ risk is expected to see 10% to 15% rate increases through the end of 2021. Underwriter’s submission inflow continues to steepen, which leads to the expected — fastidious underwriters. The escalating underwriter scrutiny is not expected to moderate soon.

Fourth Quarter Challenges

One of the most challenging professional liability placements is for contractors involved in civil projects. Examples include bridge, dam and highway builders.

Project specific placements are seeing capacity tighten, especially for architects and engineers, due to carriers holding reserves for existing client relationships.

Here are eight suggestions for better managing your underwriting outcomes between now and year end:

1. Start the renewal process early — COVID-19 has slowed down everything. It seems to take twice as long to get a burger at a
fast-food restaurant, and the same is true for insurance
renewals. Start the renewal process up to four months before policies expire. Trying to secure terms early from the incumbent market has proven successful.

2. Give detailed submissions — An underwriter’s job is to price uncertainty, so the more quality information they have on a
business’s exposures, the more competitive the price will be. In the current environment it’s important to make sure a submission stands out from the rest on the underwriter’s desk. Try to provide detailed, granular information from claims to project management.

3. Analyze various deductible levels — Study past claim history
and create a loss stratification; this can be tasked to the broker. They will analyze what would have been paid out of pocket,
and what would have been transferred to the carrier based on varying deductible levels. This will help select the best deductible option, as well as letters of credit demands from the underwriting community. One thing to remember: trading dollars with an insurance company “rarely” benefits the contractor’s cost of risk.

4. Get your primary underwriter to help on the excess — This will significantly help manage a contractor’s excess insurance cost. An underwriter receiving more premium from multiple casualty lines can be incentivized to reduce the lead umbrella/excess price. They view this, in the current situation, as one way to remain competitive against other insurers. However, this is not always possible or effective due to type of operations, underwriting appetites and venues for payroll; however, it should be an option explored as contractors test the market.

5. Review contractual risk transfer protocols — It is in the best interest of the contractor to manage the allocation of risk through contractual risk transfer, both upstream and downstream. Develop internal audit processes to manage this risk and share with underwriters. Contractors who manage this well will typically get more competitive responses from the insurance market.

6. Safety management needs to come first — At the end of the day, the best way to reduce insurance cost is to reduce claims. The goal is to have several underwriters fighting to underwrite the operations. One of the most important factors to a contractor’s safety management program is having engagement of top management.

7. Explore different risk financing
mechanisms — There are several different risk financing tools that may benefit a construction firm, depending on a
company’s appetite for assumption of risk. Single parent captives, group captives and segregated cells are readily available for consideration. Each of these financing tools has advantages and disadvantages, particularly when sharing risk with other contractors. Be intentional in this process.

8. Don’t burn bridges with the underwriting community — Relationships matter in both the construction industry and the insurance industry. While marketing the program every year seems to “feel” right, it often leads to short term gains with long term costs. Additionally, turnover with insurers impacts the process, so try to cultivate multiple relationships.

There are ways to manage the underwriting outcome with effective engagement in the underwriting process by the contractor. Team up with the broker to develop objectives based upon the analysis of losses, protocols and exposures. Step outside the box and get creative in delivering this information to potential underwriters.