Economic growth has spurred the construction industry to life in the past three years. Heading into 2016, the industry is predicted to grow exponentially. Leading the way is non-residential construction, which is driving a 40% increase in growth since 2014.
This growth is impacting the industry in a variety of ways. Jobs have seen major growth, but the demand for trained labor is far outweighing the supply. In heavy union environments like New York, the pressure to accept open shop or nonunion labor is increasing. Many skilled workers left the industry during difficult economic times and never returned.
Overall P&C Insurance Market Performance Remains Profitable
The property/casualty insurance industry turned in a profitable performance in the first three quarters of 2015. In addition, policyholders’ surplus remained near its all-time record high and the industry recorded one of its most significant nine-month profitable spans. Premium growth, while still modest, is experiencing its longest sustained period of gains in a decade.
A very long, protracted soft market has a number of key insurers looking for other ways to increase top line growth. Some are shedding under-performing lines of business while others seek out acquisition opportunities.
Engineering and Construction Expectations
The engineering and construction space is not experiencing the uniform softening of insurance pricing of the overall market. Markets that have built their reputations on market share alone are struggling to find a sweet spot to attain underwriting profit. One key area experiencing a tight market for general liability insurance is residential construction.
Residential Construction Shifts to Excess and Surplus Lines Markets
Housing starts indicate the health of the US economy, and 2015 welcomed a strong increase in residential expenditures. As cities continue to drive regional growth, demand for multifamily construction is growing faster than ever.
As general builders take advantage of construction market growth in geographies such as California, Texas, and Florida, the insurance market response has not kept up with contractors dedicated to this sector. Specifically, the standard, admitted insurance market is collapsing relative to accepting the risk associated with mixed use, residential construction. Adverse exposures from construction defect claims are driving owners and contractors to the excess and surplus lines markets for risk transfer options.
Development of construction defect from projects completed 5-7 years ago continues to force insurance carriers to evaluate their pricing models for this exposure. Standard markets continue to shy away from residential projects that have increased the flow of business to the excess and surplus lines markets.
If a contractor is made subject to an owner-purchased program, we recommend careful review of the following:
- Aggregate treatment
- Policy exclusions
- Claim handling
- Deductible treatment
- Defense provisions
- Contractual & warranty provisions
- Cross liability treatment
- Definition of occurrence
- Costs for outside risk management
- Treatment of completed operations tail
While not exhaustive, these are a few key elements to review.
The market continues to shift and brokers will look to creative outlets for construction risk transfer.