While the construction industry is facing headwinds such as inflation, labor shortages and supply chain delays, there are some indicators that things might be getting better.
Things haven't been pretty in the construction insurance market lately. Inflation, labor shortages and supply chain delays linger, while jobs continue to run behind schedule, leading to clients to request coverage extensions because they need more time to complete projects.
Nevertheless, there are some indicators that things might be getting better. Here are three signs of improvement in the construction insurance market:
1) Construction costs are still high, but easing. Supply chain disruption is still an ongoing issue for construction projects. While inflation has driven up the cost of materials, there is some easing from the highs of 2021 and early 2022, especially in the price of lumber. However, the continued shortage of qualified talent and stubbornly high inflation continue to impact material and labor costs and project completion.
With that in mind, it's important to stay in touch with your construction clients as high costs lead to higher sales, payrolls and subcontractor costs. Additionally, it's important to stay on top of changes in rating basis. Holding conversations with clients before and during the renewal process will allow agents to get ahead of any issues that come up at renewal or during an audit.
Another increasing expenditure is the cost of time. Delays in the supply chain and the backlog at various government agencies are causing projects to run longer than anticipated. Consequently, it's important for agents to help clients consider how job completion delays can affect their insurance costs and explore the need for longer policy terms on project-specific policies, which avoid costly extensions at the back end of a project.
2) New entrants in the market are creating competition. We are seeing some new capacity in the market for both primary and excess liability. There is a fair amount of competition for well-run operations and accounts with good loss history, but accounts with claims issues and high-hazard accounts are still challenging. Carriers continue to push rates, depending on the location and type of construction account.
We are also seeing pockets in the country where rates are tightening. Florida, for example, has become a more challenging state, especially in residential construction. Distressed accounts with poor loss history are also seeing fairly significant rate increases.
3) Construction automobile liability solutions are expanding. Construction accounts with heavy-vehicle schedules require robust underwriting and different solutions. Providing an excess policy over auto liability was once standard, but, in the last few years, claims severity has driven the cost up.
While higher attachment points help, we are still seeing the majority of auto liability policies with a combined single limit of $1 million. Standalone towers that go over the auto policy are available. However, this means the excess for the general liability must be written separately.
What's Ahead in 2023
How well the construction market does will depend on the economy. Rising interest rates may slow the overall pace of construction, particularly in new residential builds for home ownership.
On the flip side, we may see more commercial construction, including apartments, townhomes, and single-family residences for rent, as property developers and investors see good returns in the build-to-rent sector. In California, for example, more than one in 10 new homes will be occupied by renters, with about half in the build-to-rent market and the rest being purchased by investors who will rent them out, according to the National Association of Home Builders.
Any increased costs contractors cannot pass along to their clients will compress their margins. And while on the surface, business may appear strong, top-line growth does not necessarily translate to bottom-line growth.
Mike Mulvey is executive vice president, Northeast construction practice leader, Risk Placement Services (RPS).