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Construction Risks Becoming Harder to Place

Author: Nancy Germond

If the last two years have shown us anything, it is that supply chain disruption will be only one hurdle in insuring new and remodel construction contractors. The demand for housing, whether single-family residences or apartments, continues to increase.

Construction trends in 2022

According to Forbes in a recent article on housing trends, most housing gurus predict “the market to remain strong for a while" for several reasons. These include the following.

  • A younger demographic.
    • Now half the U.S. population, Millennials and Gen Z comprise almost a third of today's real estate market.
  • Low housing supply is fueling demand, and with it, increasing home prices.
  • Due to stricter loan requirements, experts do not expect a high number of mortgage loan defaults as the U.S. experienced in 2008's housing crash.

Additionally, skilled artisan and contractor trades such as plumbers, electricians, and kitchen and bath remodelers report strong demand. As Americans age in place, upgrades such as accessibility improvements and adding square footage for relatives or caregivers will also continue to fuel the remodeling boom.

Challenges placing construction insurance

In a recent online seminar on property markets, wholesale brokers discussed the recent insurance marketplace, The pandemic proved that the government, and customers, deemed tradespeople of all stripes “essential workers," and most continued to work steadily throughout this persistent pandemic. While the presenting brokers described the market as “in transition," 2020 saw problems with coverage as the insurance market adjusted. Lower capacity, stricter policy conditions and provisions, and other issues surfaced that insurance agents had to adapt to. These changes included the following.

  • Inflation on construction products and now, transportation costs
  • Nuclear verdicts, especially in commercial fleet exposures
  • Higher cost of goods, which resulted in higher claims payouts and an “overall poor claims experience," much of it due to inflationary material costs

Additionally, wildfires impacted lumber reserves, and the Texas freeze last year as I saw first-hand last year (my husband is a plumbing contractor), caused practically all plumbing supplies in the U.S. to head to Texas, has hit claims payouts as repaired times and prices increased.

Rate increases are higher among residential contractors

Fleet auto losses hit contractors' premiums hard

Auto risks are leading the way in losses, and excess carriers today focus on auto losses that pierce excess layers, according to one broker. What underwriters used to consider a fleet, 25 or so autos, is newly defined. Agents are finding that underwriters now classify eight or ten vehicles as fleets.

The auto experience on the underlying layer is especially important when underwriters review construction accounts, and the insured's auto loss history is strongly impacting pricing.

As nuclear auto verdicts continue across the nation, most of them tied to auto losses, carriers are carefully scrutinizing fleets. The following factors will come under close review by today's construction underwriters.  

  • Driver hiring and training
  • Annual driving record checks on drivers
  • Telematics now almost a requirement
  • Fleet safety practices overall

Add in an aging workforce, with many tradespeople working well into their late sixties and seventies, nuclear auto verdicts, and younger workers with less driving experience added to the employment mix, and you can understand the concerns worrying underwriters.

The importance of a strong submission

How can agents work against this tide of enhanced underwriting? Here are a few suggestions from the workshop.

A good submission moves to the top of the stack. Underwriters hate to request additional information. If you provide all the information with the submission, you're more likely to receive a quicker, more positive response.

According to one broker, where an underwriter used to receive one hundred submissions a month, now they're receiving 200-to-300 a month. The trend now with agents is to “market everything," so new construction submissions flood today's constructions underwriters.

Here are some specific submission recommendations made by surplus lines brokers.

  • Complete, with an emphasis on “complete," the Acord 125, 126, and 131
  • Complete any contractors' supplements required by the carrier or wholesaler
  • Complete a fleet supplemental application
  • Submit five years of currently valued loss runs
  • A five-year history of the following:
    • Revenue
    • Payroll
    • Subcontractor payments, often referred to as SubK costs
    • Fleet count

The more information you provide, the quicker your submission gets “to the top of the stack," according to one broker.

Working with wholesalers

It's important if you're working with wholesalers that you use brokers with strong industry contacts, who know the forms and the markets they represent, and have developed strong relationships with underwriters.

With the construction market in transition, it's imperative that your submission be thorough and of high quality.​

First published: June 3, 2022

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