Understand the macro factors affecting rates and underwriting attitudes.

Last fall, I penned my annual CBO “Market Update” article, and whether you remember or not, I was right on target. I predicted—with expert accuracy—that no one really knew what would happen in 2013. And I was absolutely correct. The insurance marketplace gave us quite a ride, with unforeseen consequences and challenges.

We suffered drastic changes in underwriting appetites for workers’ compensation in California. Labor laws in New York sparked an exodus of capable underwriting at any price. State supreme courts rendered decisions requiring insurers to clarify longstanding coverages—outside of case law. Anti-indemnity laws changed (i.e. Texas and California). Insurance Services Office issued “new” additional insured endorsements—again. The list goes on.

When looking to the future, we should first examine the market conditions that will drive 2014. These areas will be the root cause for shifting insurance rates for the next 12 to 18 months and will ultimately impact the selection attitudes of the construction underwriting community. My words of wisdom from last year—“opportunities present themselves equally in peaks and troughs, and being prepared for either cycle is critical in weathering both”—will remain the mantra for 2014.

In many ways, the insurance underwriting cycle is stuck between drive and reverse. Understanding the macro factors affecting rates and underwriting attitudes will provide insight into how you may address those concerns during the marketing and negotiation process. While it might be useful to know what the market is expecting—understanding how to impact rates favorably is far more useful.


A contractor has no ability to influence the Federal Reserve or the resulting interest rates. But, interest rates have the attention of every insurance company CEO and are part of every underwriting decision. Investment returns for insurance companies continue to put upward pressure on all long-tail insurance placements, such as workers’ compensation, general liability and umbrella/excess liability. Insurers are investing premiums today at lower rates than four years ago, so this alone has a general negative effect on the rates and premiums contractors pay. However, senior insurance executives understand that the pain they may inflict by rate hikes is limited by focusing only on those primary, casualty and excess lines of business, thereby creating “rate leakage” to other insurance coverages, such as property, directors and officers, builder’s risk and automobile liability. Rates of return historically have boosted the profitability of many insurers. Today, these returns resemble rounding errors. For profits, insurers are looking to smart underwriting and actuarial modeling.

Smart underwriting requires contractors to have a strong risk management strategy. Implementing this strategy will take longer during the marketing process, demand more intense loss data and require a position of flexibility—for both deductibles and coverage expansions.


The overall capacity of the industry remains strong, even with catastrophic losses incurred by Superstorm Sandy and the tornadoes in Texas and Oklahoma. Insurers are looking for effective ways to deploy capital profitably. This large capital base will moderate the degree of rate increases to contractors, especially if interest rates rise. If that happens, depending on the investments held by the insurer, underwriters could become aggressive in securing premiums, which would spark even more competitive underwriting and lead to rate reductions. However, this is not likely to happen, especially not in the next year.

The construction insurance market is small, focused and transient. The handful of underwriters have transferred from one insurer to another, moving or changing jobs every few years. So, they have seen contractor submissions from many perspectives during their careers. Understanding that only three insurance companies may be willing to underwrite a contractor’s risk requires the contractor to think long-term and focus on relationships. Be strategic, and avoid any attraction to “cheap” rate promises.


In 2008, the construction industry lost a large, qualified talent pool. Young, trained and experienced people left the industry during the downturn, and they have not returned in equal numbers. The construction industry was already strained with an aging workforce. With workers’ compensation loss ratios exceeding 100 percent, workers’ comp remains one of the biggest concerns of insurers. Many contractors are suffering losses, complicated by the aging work population. On the other hand, attracting younger people to the industry poses its own set of exposures, including proper training. Many insurers are reporting an increase in workers’ compensation claim frequency during the first 60 days of employment.

Some experts believe the construction industry will see a significant shortage of qualified craft labor to perform work. Inexperience drives workers’ compensation losses, but it also has an impact on general liability rates, particularly in regard to construction defect claims.

For these reasons, you should concentrate extensively on the labor issue during renewal presentations, particularly in regard to training, quality control and wellness plans designed to mitigate the degree and value of claims. The underwriter will appreciate the focus.

Type of Work and Location

During the past few years, apartment construction boomed and, with it, construction defect claims. The industry fears a different set of litigation challenges as the apartment inventory is slowly converted to condominiums. Therefore, as a whole, underwriters are selective and skeptical of contractors who focus on residential work.

In this climate, contractors are struggling to find work in their own backyards, forcing them to search for projects in different states, where they are exposed to new owners, unfamiliar subcontractors and different litigation challenges. Underwriters understand this exposure and will price it accordingly. Review your subcontractor selection criteria in detail, so your team can maintain best practices far from home.

Now that you have a greater understanding of what drives the market and how those factors impact rates, consider the following strategies as you begin marketing negotiations:

Relationships will continue to make a difference. Bouncing from one insurer to another will eventually be an expensive venture. With the redistribution of underwriting talent, stay connected to top-quality people.

Knowledge sought by the underwriting community will require you to think in new ways. While losses and other factors do impact pricing attitudes, construction operational challenges may be higher on their list of concerns. Being exposed to an “average” rate increase is frustrating when you believe you’re well above average. Sell your story. It will make a difference.

Best practices, safety management and quality control will continue to be on the short list of the underwriting focus. Remember, underwriters will see hundreds of programs from other contractors, so be innovative, demonstrate knowledge and share information that will impact their macro factors.

While no one knew what would happen this year, we survived it. The ride was occasionally rough and the journey longer than desired, but in the end, the market’s “bark” far exceeded its “bite.”

The upcoming year will pose new challenges, some expected, most not. Maintaining a strategic risk management vision, supported by a fluid plan, will best serve your company.