With fears of an economic recession ahead, agents and carriers can show their value by helping construction clients through any economic turmoil.
The market value of the U.S. construction industry—residential, non-residential and non-building combined—rose by over 8% between 2020 and 2021 to approximately $1.6 trillion, according to Statista. However, construction in 2022 has slowed. In June, U.S. home construction fell 2% to a 1.56 million annualized rate, the lowest level since September 2021, after plunging the prior month, driven by a slide in single-family homebuilding that underscored waning demand, according to Bloomberg.
Regardless, the builders risk insurance market continues to face challenges. Construction businesses are feeling the impact of two post-pandemic economic trends: labor shortages and supply chain issues, both of which continue to negatively impact the builders risks insurance market.
“COVID-19 changed the construction environment tremendously," says McCay Bowdoin, practice leader, construction and homebuilders program, Oakbridge Insurance. “The biggest challenge we have seen over the last two years is a shortage of available labor and subcontractors. Supply chain issues are another challenge and small contractors are experiencing delayed completions as a result."
The construction market saw premiums increase in the first quarter of 2022, continuing a trend that started 18 quarters before, according to Woodruff Sawyer, an insurance brokerage and consulting firm. In particular, projects using modular frame construction continue to experience large losses.
“Ninety-three percent of all detached single-family homes are framed construction and the supply chain issue is creating huge challenges in this market," says Jeff Benson, construction program manager, Victor Insurance Managers Inc. “Additionally, insurers are withdrawing capacity, deductibles have increased dramatically and rates have increased significantly."
Further, losses remain concerning for this sector. “We've seen continued losses in the wood frame space due to fire, which is really on the severe loss side of things, as well as water damage and intrusion events, which tend to be less severe but more frequent, though can certainly drive overall loss amounts," says Nick Cavaness, senior property broker, Risk Placement Services Inc. “We continue to see water damage and intrusion losses as being the loss leader from a frequency standpoint across both the preferred construction and the wood frame space."
These challenges are impacting the construction industry overall, but small construction businesses are being especially affected. Only 75% of small construction businesses are estimated to survive their first year in business, according to the U.S. Chamber of Commerce, and the chances of survival decrease up to year five. With fears of an economic recession ahead, agents and carriers can show their value by helping construction clients through any economic turmoil.
“The No. 1 recommendation is to make sure clients have the right value on their policy, because as a small builder operating on cash flow, it is critical to have full coverage," Benson says. “Secondly, know the product and the policy form, because not all forms offer the same coverage."
Providing underwriters with as much detailed information as possible is essential, too. “One of the more difficult sides of builders risk, specifically wood frame builders risk, are extensions—most projects aren't completing on time," Cavaness says. “The biggest thing is to be very realistic about exactly how long it's going to take—the reasoning behind that is if a carrier were to go out of business, or if the market were to change, the terms could change when you go to extend the policy."
“Small contractors, in particular, need to focus on running an organized, safety-conscious business with dependable labor in order to finish jobs in a timely manner," Bowdoin says. “That has become quite difficult in the past two years."
Also, when it comes to risk mitigation, “it starts with a culture of safety that will be beneficial and impactful for a business," says Ken Wengert, vice president, risk control—construction, energy and marine, Travelers. “This includes planning to ensure that the organization is adequately prepared before it takes on certain projects or before mobilizing on the job sites."
Further, agents can be a source of knowledge when it comes to state-specific statutes and “business-specific risks for the type of work that their client is looking to perform," Wengert adds. “Working with an agent who has construction-specific expertise can be very beneficial to their collective success down the road."
Olivia Overman is IA content editor.