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A&E Market Challenges: New Building Methods, Climate Change and Staff Shortages

The last decade in architects & engineers insurance has been highly competitive, but escalating challenges are leading to a hardening of the market in the large account space, which may eventually trickle down.
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Market capacity in the architects & engineers space is strong, which means that for agents and brokers, finding coverage is not an issue. Moreover, the solid performance of the U.S. construction industry means that there is plenty of demand for the product.

“The last 10 years in the A&E market have been very competitive,” says Audrey Lau, U.S. architects & engineers product head, Hiscox. “A lot of carriers have entered the market, which means there's a lot of new capacity, so it's been relatively soft.”

But recently, Lau has started to see increased claims activity and adverse claims development, which has led to several carriers starting to either reduce capacity or pull out of the market altogether. “There's hardening in the large account space, which may eventually also trickle down to the medium and small account space,” Lau says. “A lot of the losses that we're seeing are connected with claims that were reported more than five years ago where the settlements haven't been favorable,” she adds.

Meanwhile, today’s construction market is bringing new challenges to the A&E market. As architects, engineers and contractors take on more risk to stay competitive, they are requesting higher limits.

“The minimum limits required for architects and engineers to carry under their policy has been significantly increasing over the last several years,” says Kevin Collins, design & construction leader at Victor U.S., who notes that 10 years ago, the most  frequent request for limits was $1 million. “Now we get a lot of requests for $5-million or $10-million limits.”

Going forward, the agent can add value to client requests for increased limits by “making sure that they have a strong understanding of the carrier’s capacity that they're placing coverage with and anticipating what limits the client may need in the future if that requirement may come up on a project,” Collins says.

Recently, prefabricated and manufactured construction, the practice of assembling a variety of components of a structure at a manufacturing site and transporting those subassemblies to the location of the construction jobsite, “is getting a lot of attention,” Lau says. “They use prefabricated construction a lot in Europe and Japan. It has never really taken off in the U.S., but I think that might be changing.”

The benefits of prefabricated construction methods are that it can often be faster, cheaper, more sustainable, less wasteful and safer. However, “people still need to kind of keep in mind that its application has not been tried and tested,” and in terms of its use in high-rise construction, “it's still an untried and untested technology,” Lau warns.

Additionally, “prefabricated building presents different exposures from regular construction and agents need to be aware of the exposures that don’t exist in traditional construction,” Lau adds. “There's increased transportation, supplier and delivery risks, and there's contractual and product liability risks, as well.”

Over the next few years, Collins anticipates a lot of interest and discussion around design, architecture and engineering, and its role in mitigating the effects of global warming. “I think the concern in the industry is that with global warming, how do you design effectively both to code, which may be more of a minimal standard, while also recognizing the impact of global warming?” Collins asks. “I think that the design community is grappling with that.”

Also, architects and engineers are facing some of the issues the insurance industry is currently seeking to address: business perpetuation and talent acquisition. “It’s an aging industry and there are ownership, transitionary and continuity issues,” Collins says. “Finding good architects or designers is tough to do, which presents a real challenge because people are designing or operating on a thinner budget with less time.”

Will Jones is IA senior editor.

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Tuesday, June 2, 2020
Architects & Engineers