Tips for Navigating the Property & Casualty Insurance Market

The construction industry has made a fast recovery from the COVID-19 pandemic, yet remains challenged by the ongoing skilled-workforce shortage and supply chain disruptions — with no end in sight. While insurance renewals may not be top of mind, now is a critical time for business owners to assess their risks and coverage, and to rethink how they use insurance. By focusing on long-term risk management strategies, construction contractors can obtain customized, cost-effective coverage and be prepared for what the future holds.

Property & Casualty Update

Prior to the onset of the COVID-19 pandemic, the construction industry already endured several years of a hard property and casualty (P&C) insurance market, triggered in part by a considerable number of natural disasters including floods, hurricanes, tornados and wildfires.

The hard P&C market is expected to continue for the near future as risks become more complex and continue to diversify. According to a report on the P&C market by Fitch Ratings, “Insurers continue to face considerable economic and investment market volatility, particularly from the onset of higher U.S. inflation tied to looser monetary policy and supply chain issues that creates uncertainty in estimating loss costs in pricing and reserving.”

What does that mean for construction business owners? Alera Group’s Property and Casualty 2022 Market Outlook highlights the unique challenges insurers and businesses continue to face and provides strategies to help businesses in obtaining new policies and preparing for renewals.

Here’s a look at six key factors influencing P&C rates and renewals for the construction industry, all reported in the Market Outlook, followed by important steps construction business owners can take to ensure comprehensive, cost-effective coverage.

1. Risk quality will be a major consideration. 

The market will differentiate between accounts with good loss histories and those viewed as higher risk. Insurers will look at account profitability over an extended period, rather than two to three years prior, which was the norm. Policyholders with poor risk quality, significant losses and exposure to catastrophe-prone regions should anticipate above-average rate increases, coverage restrictions and higher deductibles. Some businesses may struggle to obtain or renew coverage at all.

2. Professional liability insurance will be an increasingly common requirement. 

More government projects are requiring contractors to carry this coverage. Although there is ample capacity in the U.S. professional liability market, underwriters are selective in how they use their capacity due to a tightening marketplace outside of the U.S.

3. Greater reliance on technology will escalate cyber exposure. 

Once relatively immune to cyber risk, the construction industry now ranks third among North American industries for reported ransomware attacks. According to a study by SafetyDetectives, 13.2% of construction firms in North America indicated they suffered at least one ransomware attack in 2020. Cyber insurance is a critical coverage for contractors to help mitigate losses stemming from business interruption, reputational harm, ransomware attacks and privacy liability, among other potential risks.

4. Multiyear policies will remain difficult to obtain.

Multiyear policies are becoming a thing of the past as insurers are unwilling to guarantee price beyond 12 months without a contractual commitment to the specific projects to be completed during the policy period.  

5. Expect tighter terms. 

Underwriters will offer stricter terms and conditions on policies, including reductions in limits of liability and increased retentions.

6. Workforce issues may result in higher workers’ compensation rates.

Workers’ compensation rates are currently favorable, but there are growing concerns that the shortage of skilled workers and an aging workforce will result in increased claims, driving up 2023 rates.

Work With Your Broker to Reevaluate Your Risks

The P&C market is expected to be increasingly positive for contractors who are financially strong, effectively manage risks and are focused on worker safety. When applying for and renewing insurance coverage, it’s important for businesses to highlight their risk management strategies and present a detailed, accurate loss-history report. Obtaining and renewing coverage is no longer a passive process. Owners should meticulously maintain records, assess and address potential risks throughout the year, and pay close attention to any changes in services provided to ensure proper coverage.

Rate increases and changing policy terms are leading many businesses across industries to test the market. The sheer volume of activity is significantly slowing the process. Increased scrutiny from underwriters and less decision-making authority at the desk-underwriter level are further lengthening the time it takes to respond to new business and renewals. In this market, last-minute requests for proposals will not get most underwriters’ attention. The optimum time to begin the process falls between two and four months in advance of the policy expiration date, depending on the complexity of the account and the markets available.

It’s important to pay close attention to exclusions. Communicable disease exclusions have become the norm, and some insurers will also attempt to add exclusions to construction policies for sexual abuse and molestation claims, as well as for subsidence and building collapse. Alternative program structures, including different retentions and deductibles, loss-sensitive programs and captives, may help reduce insurance costs while also maintaining adequate protection. For cyber liability coverage, be prepared to share a detailed cybersecurity preparedness and recovery plan. Finally, construction companies can help obtain the best rates and coverage by conducting due diligence of their risk exposures and mitigation tactics on an ongoing basis.

Having a comprehensive risk management strategy that includes cyber, pandemic and other emerging risks can go a long way in gaining more favorable terms for future P&C needs. Business owners should seek assistance from their carriers or insurance brokers for risk management services, which are often provided at no additional cost. Reducing risk exposure not only helps in receiving favorable policy terms and pricing, but it also keeps projects on track. By working together with your insurance partners, you can effectively prepare for and manage exposures and build a stronger, more resilient business.