Executive Vice President, Northeast Construction Practice Leader
- Uniondale, NY
Things haven't been pretty in the Construction insurance industry lately, but there are some signs of improvement.
Inflation, labor shortages and supply chain delays linger, and jobs continue to run behind schedule, leading clients to request coverage extensions because they need more time to complete projects. However, we're starting to see slight improvement, says RPS's Mike Mulvey, executive vice president — New York.
Let's take a look.
"Supply chain disruption is still an ongoing issue for construction projects. Inflation has driven up the cost of materials, but we have seen some easing from the highs of 2021 and early 2022, especially in the price of lumber," says Mulvey. "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, be sure to stay in touch with your construction clients. Because high costs "lead to higher sales, payrolls and subcontractor costs. it's important to stay on top of changes to their rating basis," says Mulvey. He suggests holding conversations with clients before and during the renewal process to get ahead of any issues that will come up at renewal or 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.
"It's important for a broker to understand and help clients consider how job completion delays can affect their insurance cost," Mulvey explains. "When possible, we explore the need for longer policy terms on project-specific policies to avoid costly extensions at the back end of a project."
Turning to the Construction insurance marketplace, some new capacity has come online for both primary and excess liability.
"There is a fair amount of competition for well-run operations and accounts with good loss history," notes Mulvey. "Accounts with claims issues and high-hazard accounts are still challenging."
Carriers continue to push rate, depending on the location and type of construction account.
"There are pockets in the country where rates are tightening. Florida, for example, has become a more challenging state, especially in residential construction," says Mulvey. "Distressed accounts with poor loss history also see fairly significant rate increases."
Mulvey notes that 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 costs up on the lead in Excess coverage," he says.
"Higher attachment points help, but we still see most Auto Liability policies with a combined single limit of $1 million. For contractors with distressed auto exposures, RPS has provided stand-alone towers that go over the Auto policy and has written the Excess coverage for General Liability separately."
Looking toward the future, 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," says Mulvey. "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."
For example, according to the National Association of Home Builders, more than one out of 10 new homes in California 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.
"Any increased costs contractors cannot pass along to their clients compress their margins," explains Mulvey. "So, on the surface, business may appear very good, but top-line growth does not necessarily translate to bottom-line growth.
"It's something to keep an eye on, but the economy has shown to be resilient thus far, and people are still working."