Step back from all the misery the COVID-19 pandemic has caused, including worker shortages and supply chain disruption. Take a good look at all the insurance challenges a years-long hard market for Property and Casualty coverage has created. Scan the landscape of damage from a multi-year series of catastrophic events — all the wildfires, all the hurricanes, all the tornadoes and more.
Given a chance to view our world and circumstances from a broader perspective, those of us responsible in some way for work-related risk management during the past few years should at least take some satisfaction in this: We’ve become better at our jobs.
Of course in few, if any, industries is risk management as important as it is in construction, where longtime priorities include:
- Safety risk — particularly on construction sites, where various hazards can lead to worker injury;
- Legal risk — offering scenarios such as a lawsuit arising from a contract dispute with a client or an employee practices liability claim filed by a current, former or prospective employee alleging discrimination or harassment;
- Financial risk — with cash flow and liquidity dependent on sales, economic conditions, competition and other factors;
- Project risk — with management of resources, time and personnel all vital to keeping projects on schedule and within budget;
- Environmental risk — something that has become increasingly prominent in recent years in response to all those catastrophic events, with the level of risk largely depending on geography.
Add to that a newer priority: Cyber risk. Though too many holdouts remain, most companies have come to recognize Cyber Insurance as essential in today’s largely digital world.
The rest of those priorities may not be new, but many of the ways construction business owners and managers now respond to them are. Out of necessity, those in the industry have become more sophisticated insurance consumers. Construction companies and contractors who once may have purchased only whatever insurance was required by law are now more likely to appreciate that investing in risk management and the right insurance policies can save not only money but perhaps their business itself.
For their part, insurance professionals — the best ones, anyway — have redoubled efforts to collaborate with clients on safety programs, policy updates and detailed applications, all while designing customized programs that typically include complex layers of coverage.
It’s been a lot of work. And we’re all better for it.
P&C Market Outlook for 2022
In December, Alera Group released its Property and Casualty 2022 Market Outlook whitepaper, which includes this bit of qualified good news for the construction industry: “The market is increasingly positive for contractors who are effectively managing risk, financially strong and focused on worker safety.” (Italics added here for emphasis.)
Other key points in our forecast:
- 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 of time rather than two-to-three years, which was the norm.
- Professional Liability Insurance will continue to be an increasingly common requirement. More government projects are requiring contractors to carry this coverage.
- Greater reliance on technology will continue to 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 the cybersecurity publishing firm SafetyDetectives, 13.2% of construction firms indicated at least one attack in 2020. As a result, Cyber Insurance is and will continue be a critical coverage for contractors.
- Multi-year policies will remain difficult to obtain. Insurers will rarely be willing to guarantee price beyond 12 months without a contractual commitment to the specific projects to be completed during the policy period.
- Expect tighter terms. Underwriters will offer stricter terms and conditions, reductions in limits of liability and increased retentions. For example, residential buildings will often see significant increases in the water damage deductibles in Builder’s Risk policies.
Among coverages, for Commercial Auto we foresee a continued rise in rates, with availability, capacity and underwriting scrutiny all remaining stable. Environmental Liability looks to be stable across the board, while General Liability appears to include a mix of higher rates, greater availability, and stable capacity and underwriting scrutiny. Property coverage is a mixed bag as well, combining rates that continue to rise (though more modestly) with stable availability and capacity, along with unfavorable underwriting scrutiny.
Conditions in the Umbrella and Excess markets continue to be generally unfavorable for buyers, while conditions for Workers’ Compensation offer a cherished bit of good news for consumers: favorable availability combined with stable rates, capacity and underwriting scrutiny.
Where you work is a key factor in what kind of coverage is available and what you’ll pay. Vulnerability to catastrophic events is a major factor, but far from the only one. As noted in the Market Outlook, your organization’s claim history will be a significant determinant, along with the quality of your risk management policies and procedures.
But some states — North Carolina being one — are recognized as more business-friendly than others, and sometimes a state or region’s robust growth can tip the balance of the risk/reward scale in an applicant’s favor. And if you do business in multiple states, it’s essential to work with an agent, broker or team with deep knowledge of each location in which you do business, to ensure your policies conform to local regulations and avoid potential gaps in coverage.
What You Can Do
Applying for and renewing insurance coverage should not be a passive process. Take an active role in protecting your business with customized, cost-effective coverage.
- Work closely with your broker to re-evaluate your current risks. COVID-19 and changes in the real estate market are affecting the services contractors are providing, the contracts they are required to sign and the projects in which they are becoming involved. Therefore, it is critical to ensure that your program addresses the needs of your current operations.
- Allow ample time. Rate increases and changing policy terms are leading many organizations to test the market. The sheer volume of activity is 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. Typically, the optimum time to begin the process falls between two and four months in advance of your policy expiration date, depending on the complexity of your account and the markets available. Talk to your agent or broker about what makes sense in your situation.
- Pay attention to exclusions. Communicable disease exclusions have become the norm. Some insurers will also attempt to add sexual abuse and molestation exclusions to construction policies, along with subsidence and building collapse.
- Explore alternatives. Alternative program structures, including different retentions and deductibles, loss-sensitive programs and captives, can help you reduce insurance costs while maintaining adequate protection.
For a more in-depth look at strategies for navigating insurance market conditions, read the Alera Group Property and Casualty 2022 Market Outlook, where you’ll also find valuable information on factors driving the current P&C market, as well as analysis by industry and lines of coverage. To obtain the whitepaper, click on the link below.
About the Author
Kurt Sokolowski, CIC
TriSure, an Alera Group Company