Expectations for construction risks: Rates, terms and conditions
The U.S. construction property and casualty market remains pliable with aggressive rates and flexible terms and conditions. With the exception of some industry pockets, the soft market continues. Even in the harder areas, such as New York construction and residential construction, some stability in pricing and coverage is starting to take hold.
While increased carrier competition, especially from new regional markets, is keeping the overall market soft, underwriters are disciplined — in some cases aggressively disciplined — in taking a hard look at loss history and safety procedures when reviewing accounts. Contractors who do not manage safety well will find a harder market than industry averages would suggest.
While pricing remains soft, markets are looking to decrease their exposures via policy exclusions and limiting endorsements. This is particularly true with some of the newer market entrants and the excess and surplus lines markets. When reviewing quotes — both from new or incumbent carriers, possible exclusions, such as residential exclusions, broad wrap-up exclusions, anti-stacking endorsements and others must be fully vetted to avoid sacrificing long-term stability for short-term pricing.
One short-term area of concern is the auto liability market. Where auto liability was often viewed as an add-on to a multi-line placement, the rising frequency of claims from distracted drivers and aggressive drivers is driving those rates up.
Contractors casualty insurance (general liability, workers’ compensation, auto liability, umbrella/excess liability coverages)
General liability: Rates are stable with downward potential for accounts with aggressive and demonstrated safety protocols. The focus on safety is also leading to an increase in options with greater risk retention; higher deductible options are being offered and considered.
In the residential sector and in New York construction, recent spikes in rates have decreased and some stability is starting to take hold. In these areas, there is lower carrier participation, but those carriers in the market are committed. There is little, if any, opportunistic underwriting taking place.
Workers’ compensation: For the most part, medical costs are flat, which has contributed to rate stability. However, there are several warning signs on the horizon that could make 2017 a harder workers’ compensation market.
- Prescription drug use and costs are rising. Some carriers have tried to control this by putting limits on opioid usage, but the trends on both usage and costs are rising. Also, on a similar track, concern mounts over marijuana as more states decriminalize and/or legalize usage.
- Judicial and legislative decisions are driving costs. For example, NCCI estimates that a recent Florida Supreme Court decision will lead to a 17.1% rate increase in Florida. While other states have also felt rate pressure, election concerns are deferring rate increases until after November 2016.
- While the frequency of losses may remain flat, an aging workforce is leading to increased severity of losses.
Auto liability: This area is seeing increased rate pressure across the board. The rise in claim frequency and severity, coupled with a historical tendency of underwriters to underprice the true costs when this coverage is part of a multiline purchase, has led to a market shrinkage and price correction in 2016. This trend is expected to persist through 2017. Underwriters will take a much harder look at fleet safety, driver records and loss control procedures than they have in the past.
Umbrella/excess liability: The market remains robust, with plenty of capacity and pricing pressure from domestic, London and Bermuda markets. Concerns with such coverage center on proper terms and conditions to ensure alignment with primary general liability, auto liability and employers liability coverage.
Builders risk and construction property coverage: Heading into the third quarter of 2016, the U.S. construction property and inland marine market remains soft due to an abundance of capacity, which stems from domestic carriers continuing to increase their net and treaty capacities, as well as new and formidable international players entering the U.S. market space.
In lockstep with continued downward pressure on pricing, carriers are being driven to provide broader coverage on all projects. Over the past six months, in an effort to remain viable, many carriers have released new master builders risk and project builders risk policy forms. Many of these forms are now including, automatically, coverage that had previously been negotiated and underwritten (e.g., fungus, pollutant cleanup and removal, contract penalty, etc.).
Competitive market conditions are expected to endure well into 2016 and beyond, especially if predictions hold for a slower than average Atlantic hurricane season.
Contractors professional liability insurance: The professional liability (PL) marketplace has been very active over the past year as new market entrants have increased capacity, broadened coverage and created more competition and flexible options for the ever-changing construction industry.
We are experiencing the most capacity in history in the construction professional liability space for contractors and owners with limits of roughly $300+ million available in the U.S. through primary and excess capacity. If required this can be supplemented by a further $150+ million of additional capacity in London, Bermuda and elsewhere for construction-related professional liability risk.
Among the traditional providers of contractor-based professional liability coverage new carriers have entered the space and are aggressively approaching renewal and project-specific opportunities. Through this competition, buyers have seen favorable terms and conditions on renewals by lowering retentions, enhancing coverages and increasing limits in corporate programs. Rates are flat to -5% on typical contractor renewals.
As mentioned in previous issues, residential (i.e., for-sale) construction continues to drive loss ratios for professional liability insurers from both a frequency and severity perspective. This is a challenge, as the marketplace is restricted, but owners, design firms and contractors have significant exposures on residential projects as evidenced by adverse loss ratios. Currently, there are only a few markets that offer project-specific policies on residential projects at restricted limits and conditions. Pricing for these policies is higher than prices for any other project class.
The owners protective professional indemnity (OPPI) product has gained popularity, with its ability to offer the project owner greater protection from damages from professional negligence than contractually requiring annual policies or project-specific policies from contractors and design firms. The marketplace for this product has expanded along with the PL marketplace in general. Historically, and depending on project type, four carriers could offer competitive primary options— but now have at least eight. In addition to those eight, there are many more that can offer excess-only capacity on top of a primary OPPI.
As the values of construction projects grow at an unprecedented rate — the billion-dollar project is commonplace — delivery methods and contractual obligations have also changed at lighting speed and many contractors are finding themselves underinsured in relation to the exposure. We have seen an increase in design-delegated responsibilities inside of general contracts and construction management agreements. These design delegated subcontracts need to address professional liability exposures. General contractors, design-builders and construction managers alike are reviewing their subcontractor agreements and are requiring increases in professional liability limits of subcontractors with professional exposures as part of their sub-packages. The marketplace is keen to help address these exposures.
More focus is being placed on what have up to now often been nice-to-have bolt-on coverages. The operation of first-party, mitigation of loss cover is becoming more and more relevant with growing popularity in design and build procurement. As technology/network liabilities evolve, a spotlight is being thrown on the level of protection actually offered by cyber liability extensions within professional liability placements.
Finally, owners and lenders are contractually requiring annual and project-specific professional liability policies at higher limits and are more educated on professional exposures than in the past. This has resulted in contractors and design firms with lower limit policies that can mean struggles with contract compliance. As the marketplace is more competitive than ever, it is time to consider raising the limits on practice policies especially as the exposure base grows.
Contractors pollution liability insurance
The application of environmental coverage to the construction industry remains at an all-time high as a result of contractual requirements, an increase in exposure due to regulation and enforcement, and broad coverages offered by more than 30 environmental carriers. Sustained domestic and international construction activity has fueled demand for contractors pollution liability products, especially when placed in conjunction with builders risk or wrap-up programs. Despite this demand, soft market conditions have resulted in flat to decreasing rates for preferred classes of monoline contractors pollution liability programs, except where buyers have seen significant claim activity or professional liability exposure.
The continued rise in the frequency of environmental claim activity, especially resulting from indoor air quality (IAQ) issues, including mold and Legionella) challenges both the construction industry and environmental insurance providers. More recently, high-profile claim issues related to wastewater treatment, water supply, and oil/gas pipeline operations could have an adverse effect on contractors working or projects related to these industries. Potential exclusions or limitations on capacity of $10 million or less could soon be commonplace. Accordingly, insureds are becoming more aware of the importance of establishing an environmental claim protocol, including incident reporting and notice, before claims happen. Similarly, insureds are seeking to further reduce their exposure by broadening environmental coverages wherever possible on their standard P&C lines (general liability, builders risk, property, auto) to increase their potential for overlapping coverage with environmental policies.
Potential threats to the favorable underwriting conditions in the environmental marketplace include a decrease in appetite by some carriers for habitational exposures as well as redevelopment and M&A activities that may pose longer-term and potential moral hazard exposures associated with known conditions and voluntary testing. Additionally, recent market consolidation by major environmental insurance carriers could signal an eventual hardening of the market if the trend continues.
Controlled insurance programs
The controlled insurance program (CIP) marketplace continues to be competitive and grow for both mixed-use, multifamily residential, homebuilders and commercial construction. Pricing is stable and project capacity is plenty.
Regarding residential construction, CIPs are primarily placed in the excess and surplus lines marketplace. Coverage terms and conditions can vary, and there is greater awareness among project sponsors that specialist retail broker and wholesale partners are necessary.
While general liability-only (GL-only) programs are commonplace for residential construction, in particular, for-sale construction, isolating the workers’ compensation from the CIPs is becoming commonplace for commercial construction. Factors driving this shift include coverage consistency, collateral control and policy certainty through the statute of repose. Admitted markets still shy away from for-sale construction risk in their portfolios. Apartments, too, are still a less tolerable risk profile for the admitted marketplace due to the possibility of conversions in future years to condominiums. Large complex projects such as infrastructure, light rail and heavy civil and commercial construction still command competitive WC/GL CIP programs from the admitted markets, typically with retentions starting at $250,000 but with upward pressure on retentions.
New York remains a unique place for construction risks due to the state labor laws. For the most part, projects in the metro area and the five boroughs, in particular, are underwritten on a project-specific basis, non-CIP. These CIPs are typically two-line and afford little true risk transfer. In other words, the retentions are usually close or equal to the limit of liability provided on the general liability line of coverage. Without legislative relief, we see little to no change in how construction insurance is underwritten in New York City. Finally, overall excess pricing for CIPs remains very competitive, especially above the lead $25 million layer. We do see the need in today’s marketplace for arranging the lead $25 million with more than one or two carriers. In many cases, carriers will provide ventilation options, meaning they will participate with a smaller limit (e.g., $10 million) in the lead $25 million and then provide additional capacity above the $25 million lead layer.