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Casualty Market Outlook for the U.S. Construction Industry

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The Casualty market firming for U.S. Construction risks, which began in the third quarter of 2019 and continued into 2020, has intensified in the second half of the year. These market conditions are likely to extend into 2021.

The firming market has resulted in rate increases, capacity shrinkage and higher attachment points. Policy submissions are receiving greater underwriting scrutiny and carriers have introduced more restrictive coverage terms due to an increase in losses on long-tail liability lines.

Poor loss history and social inflation are driving the hardening Excess/Umbrella market for Construction risks. The most significant impact is being felt by residential, utility and street-road contractors, and those with auto exposures.

“Excess capacity has dropped in large part as carriers within a tower are paying for higher losses,” explained Sarah M. Wirtz, RPS Area Senior Vice President/Casualty Manager, National Environmental Practice Leader.

She observed that more carriers are now needed to get to the desired limits.

“Where it once involved one or two carriers to fill a $10 million tower, it now takes three or four carriers,” Wirtz said. “A $25 million tower can take up to five carriers.”

Coverage Restrictions, Exclusions

Construction defect claims are also on the rise, prompting carriers to impose coverage restrictions on known losses, exterior insulation and finish systems (EIFS), mold, earth movement, residential construction and additional insureds.

The most significant construction defect problems are occurring in California, Nevada, Arizona, Texas, Florida and Colorado; however, many other states are also seeing growth in litigation in this area.

To a large degree, the construction defect battle has been waged in the residential construction arena, particularly in multifamily housing. Some insurers have pulled out of that segment of the market altogether, or are withdrawing from specific problem regions.

Wildfire exclusions are also prevalent in the U.S. Construction market, and capacity for that coverage in high-hazard areas such as California is virtually nonexistent in the standard marketplace. Securing full coverage throughout a tower is a challenge for most insureds.

COVID-19 Impact

As the COVID-19 pandemic began to unfold, construction shutdowns and delays reduced payroll, prompting insureds to turn to their insurers for assistance. While revenue was down, some carriers lowered minimum premiums or offered payment extensions.

With most construction projects now back on track, carriers have been closely evaluating the precautions and safety protocols that general contractors and subcontractors have in place to mitigate the spread of coronavirus.

“These loss-control measures may involve hiring outside vendors for additional OSHA training, performing temperature checks and contact tracing on employees, scheduling work shifts and conducting virtual inspections,” noted Wirtz.

A significant volume of construction-related environmental claims continue to be filed, with exposures arising from installed building products, indoor air quality and excessive siltation.

“Amid COVID-19, we may potentially see greater exposures with restoration and industrial contractors cleaning or remediating office, retail and industrial buildings for returning employees,” Wirtz predicted.

“In addition, we may see more mold and Legionella claims in vacant buildings due to mandatory closures amid the pandemic,” she said, advising: “Contractors should have the required expertise in this area and be IICRC-certified.”

The Excess construction market remains fluid with regard to changes in capacity, appetite and underwriting guidelines.

“What a broker asks for on behalf of a client 90 days prior to renewal may be quite different as we get closer to the policy date,” Wirtz explained, making it critical to manage client expectations.

“Is the incumbent willing to remain on the account? Will policy terms be different? Will capacity change?” she asked. “Getting ahead of the renewal and discussing an account early helps us, and the broker, be creative while not blindsiding an insured.”

Relationships Matter

Remote work triggered by the pandemic and the greater influx of submissions have resulted in many underwriters taking on multiple roles. Greater underwriting scrutiny has also required additional management oversight, lengthening the underwriting process. Strong relationships can deliver a significant advantage.

“Open communication and transparency are key right now,” said Bill Wilkinson, RPS President, National Casualty Brokerage. “This involves educating clients about the state of the market and setting realistic expectations.”

He also stressed the importance of a comprehensive submission, making sure “ACORD apps, supplemental apps, five-year loss runs, loss control procedures and technology utilization, such as driver cameras, etc., are all part of the submission so underwriters have what they need to accurately rate and quote an account.”

Wirtz agreed. “Starting the renewal process early, supported by a complete submission, allows us to begin talks with the incumbent and new markets to assess their position on capacity, pricing, coverage terms and exclusions that can potentially impact an insured’s insurance program.”

It is likely that challenging conditions in the Casualty market will continue throughout 2020 and 2021. The impact of nuclear verdicts, changing liability exposure and rising claim frequency will persist while the impacts of the pandemic continue to exacerbate the situation.

With carriers also experiencing financial stress from their investment performance, they will likely impose stricter underwriting requirements for optimal risk selection and further adjust their rates to improve profitability. This will likely push more accounts into the E&S market, where insurers have greater flexibility in adjusting coverage terms and conditions.

To properly navigate the Casualty E&S market and deliver the best coverage options for clients, retail brokers should partner with a wholesale broker with a solid track record and longstanding relationships with seasoned underwriters.

Experienced wholesale brokers know how to negotiate with underwriters to restructure placements to make them more affordable. They also have a deep understanding of how to best assemble a program to obtain desired coverage limits.

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