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Survey Report

Insurance Marketplace Realities 2020 – Construction


November 13, 2019

The marketplace for construction continues to tighten, resulting in rate increases across multiple lines of insurance coverage.
Rate predictions
  Trend Range
General liability Neutral increase (yellow line with purple triangle pointing up) Flat to +15%
Workers compensation Neutral derease increase (green triangle pointing down, yellow line, purple triangle pointing up) -2% to +4%
Auto liability Increase (Purple triangle pointing up) +3% to +20%
Umbrella liability Increase (Purple triangle pointing up) +15% to +30% or more
Excess liability Increase (Purple triangle pointing up) +15% to +25% or more
Builders risk Increase (Purple triangle pointing up) +5% to +10%
Professional liability Neutral increase (yellow line with purple triangle pointing up) Flat to +5%
Project-specific/controlled insurance programs Neutral increase (yellow line with purple triangle pointing up) Flat to +5%; Flat to +5% for excess
Subcontractor default Increase (Purple triangle pointing up) +5% to +10%

Key takeaway

The marketplace for construction continues to tighten, resulting in rate increases across multiple lines of insurance coverage. Whether their focus is cost containment, program sustainability or alignment with long-term risk management objectives, contractors should be prepared to evaluate different program structures and risk transfer techniques to achieve the best results.

General liability (GL)

U.S contractors are facing an array of headwinds from general liability carriers. Underwriters are responding to poor loss experience by increasing rates, closely evaluating program structures and attempting to add more restrictive policy wordings.

  • Submission flows to carriers are up significantly, and markets are exercising more underwriting rigor.
  • New business is not encountering the same flexibility and ease in the underwriting process as in prior market cycles.
  • Adverse combined ratio results remain top of mind as underwriters analyze rate adequacy. Over the past few years, well-publicized challenges in auto liability have resulted in many instances of GL rates being suppressed as underwriters sought ways to offer total account pricing that was competitive. At the same time, however, legal expenses continued to rise, and plaintiff verdicts delivered unprecedented, catastrophic outcomes, putting pressure on carrier portfolios. The window to discount GL has closed and we can expect greater scrutiny ahead.
  • Rising loss activity from premises and operational risk, historically overshadowed by long-tail completed operations losses, persists. Carriers have tightened their appetites and are seeking out best-in-class risks, as well as requiring extensive underwriting data and engineering information.
  • Comprehensive underwriting information is more critical than ever in the renewal process — including thorough descriptions of newly formed and/or acquired entities, loss experience and historical exposures. Carriers are increasingly influenced by predictive modeling to drive underwriting decisions, thus making accurate exposure data imperative.
  • More intensive underwriting has significantly slowed the quotation process. Providing adequate lead time to obtain renewal terms is key.
  • Wildfire exclusions have become commonplace and wildfire capacity is now extremely limited.

Auto liability

Auto liability remains the most challenging line for insureds, with persistent rate increases and program structure changes. Underwriting scrutiny is intense, often irrespective of individual loss experience.

  • Commercial auto insurers have pushed price increases for 31 consecutive quarters (August 2019 Fitch Ratings Report) with no indication of reversing course. Results from 2018 produced a 108 combined ratio, and despite some improvement year over year and a rise in direct written premiums, signs still point to underwriting losses for 2019.
  • More claims are being litigated, with verdict outcomes often in seven or eight figures. High-value verdicts mainly stem from traumatic brain injury claims (TBI), negligent entrustment/driver selection, distracted driving, and the influence of "social justice" in the courtroom. A rise in third-party litigation finance is further encouraging lawsuits.
  • The robust economy is putting more vehicles on the road, increasing the frequency of accidents. Current low unemployment rates translate into driver shortages, pushing companies to hire less experienced drivers.
  • Auto physical damage pricing continues to rise. Comprehensive/collision claims can escalate quickly due to increased technology in vehicles — a bumper is no longer just a bumper, it's also a sensor and a camera. Auto physical damage deductibles for comprehensive and collision are also climbing, with some carriers setting a minimum of $2,500 for light trucks.
  • Rate increases are hovering between 3% and 10%. Larger fleets, heavier fleets and risks with adverse loss experience are subject to greater increases — in some cases north of 20%. Jurisdictional considerations (Cook County, IL, for example) can also impact the level of rate increase.
  • Auto concerns are not just relevant to practice programs. In controlled insurance programs or project-specific policies, contractors on site are generally responsible for providing comprehensive automobile liability insurance. While coverage can usually be provided by the contractor's practice policy, hired and non-owned coverage is increasingly not included, or limits are inadequate. In these scenarios, we may recommend adding the coverage into a project CIP, provided the proper underwriting information is available.

Workers compensation

The workers compensation outlook remains positive for buyers, offsetting difficulties in auto liability and general liability. While overall a very positive signal to the health of this line of business, it has carriers worried about maintaining profitability and premium volume.

  • Favorable loss experience in the aggregate continues to drive state-approved base rate decreases and sustained competition within the market.
  • The line's combined ratio has improved to its lowest level in over half a century. NCCI estimated that as of year-end 2018, private insurers had a $5B loss reserve redundancy — the highest in at least 25 years.
  • Annual written premiums are expected to decrease over 10% for full year 2019 as a result of decreasing filed rates and a competitive market.
  • Exceptions remain in California and New York, where carrier appetites (and historical results) still present challenges for buyers. Florida presents another unique dynamic, as base rate suppression and restrictions on discretionary pricing mechanisms have caused insurers to question whether they can be profitable.
  • Positive loss trends are attributable in part to the marked increase in both the insurers' and insureds' stake in managing risk, including use of managed care, enforcement of return-to-work programs, nurse triage, fee schedules and telehealth.
  • Managed care vendors, carriers and TPAs continue to focus on reducing opioid use through alternative pain management methods, including legalized marijuana. However, legal marijuana may also present an entirely new host of workplace issues.

Umbrella/excess liability

Construction umbrella and excess liability placements are very challenged, and we expect this complicated environment to continue through 2020.

  • The lead umbrella marketplace continues to struggle with construction risks. Construction underwriters are increasingly scrutinizing rate, capacity and attachment points.
  • The bench for lead umbrella players is limited, with those still willing to write leads reducing capacity. Historical lead umbrellas of $25M have become exceedingly rare. Virtually all programs require more carriers to complete desired limits.
  • Unsupported umbrella programs (where the umbrella market does not also write the primary casualty program) are particularly challenged.
  • On excess placements, minimum premiums have risen significantly, a problem especially for smaller risks. Where excess carriers would historically offer limits for as low as $1,000 per million, we now see minimum premiums approaching $2,500 per million and higher.
  • Fleet exposures and attachment points, while a focus in the broader umbrella market for some time now, are seeing continued scrutiny in the construction space, especially for street and road/civil contractors. Buffer auto liability programs are a potential response; however, this marketplace has undergone a significant retrenchment since 2016 when key carriers exited. The result is highly selective deployment of capacity and high rates online.
  • Wildfire exclusions are prevalent, and capacity for coverage in high hazard areas (i.e., California) is virtually non-existent in the standard market. Securing coverage up through the tower will be difficult for most insureds. Many are turning to project-specific programs to address this exposure, especially major utilities in compromised areas. Players here are predominantly E&S, and pricing reflects high premium to limit ratios.

Controlled insurance programs (CIPs)

Recent increases in reinsurance rates are driving up CIP pricing, and we have seen capacity begin to pull back. Markets remain competitive on commercial business, but residential programs have become difficult in certain geographic regions.

  • Rolling programs continue to be popular, facilitated by carrier creativity and flexibility, e.g., pay-as-you-go (enroll) options and subscription programs. The volume in these types of programs tends to yield more competitive rates (i.e., economies of scale).
  • Dual-line CIPs remain steady, while general liability-only programs continue to grow in popularity — driven by ease of placement and administration, low retentions and limited (or zero) collateral requirements.
  • While the GL-only realm is dominated by the E&S marketplace, standard markets tend to be aggressive on larger projects, leveraging multiple lines of coverage. Enhancements may also include lower SIR options to reduce/remove collateral requirements and early close-out options to move accrued liabilities off the sponsor's balance sheet.

New York general liability

  • In 2019 we've seen significant movement in the E&S space, with new carriers entering and others exiting the New York market for trade contractors. In general, the environment continues to harden due to the increased size of payouts on labor law claims. Many carriers with historical experience in New York have either pulled away or restricted their overall program offerings. In certain cases, and depending on the trade classification, carriers are requiring 100% premium to limit on primary general liability.
  • While some new capacity enters the New York marketplace for primary general liability, excess carriers are reluctant to attach above newer players with little or no experience in New York, which is driving excess pricing up further.
  • The standard markets (which offer large retention structures only) remain opportunistic by picking and choosing where they are going to play. Best-in-class risks may still encounter favorable terms on renewals.
  • Otherwise, markets continue to seek mid to high single-digit rate increases. Contractors seeking low deductible programs continue to find themselves in the challenging E&S space.
  • Historically, London markets have provided solutions where the domestic carriers have pulled back. Due to poor overall results, London has reduced its available capacity and is looking for higher rates and attachment points.

New York controlled insurance programs/project-specific placements

  • CIPs remain a common solution to ensure coverage certainty and unified terms and conditions, but general liability retention levels continue to rise. The standard markets have either pulled away or require increased retentions and large collateral outlays. Carrier concerns are no longer confined to just erosion of their maximum program aggregate but also paying out defense dollars on labor law claims that settle above the retention.
  • The minimum general lability retentions in New York have risen and are now in the $2 – $5M range. Lead excess pricing (up to $10M) continues to be a challenge with carriers seeking up to 100% premium to limit depending on the project exposures. Further, we are seeing defense costs structured inside the limit as carriers are trying to mitigate their overall exposure on labor law claims. As collateral has become a large part of a CIP, carriers are open to creative solutions featuring pay-as-you-go options for both collateral and premium payments.
  • As an alternative to a CIP, combined owner-general contractor liability programs have increased in popularity. In addition to adequate coverage and dedicated limits for the project, they offer potential cost savings. Rising demand has led to the development of several branded options.

Builders risk

The North American builders risk market continues to exhibit signs of firming, though not to the degree we have seen in the fixed/operational property market, as ample capacity continues to drive competitive terms for the right risks.

  • The global builders risk marketplace has experienced a rash of major losses in recent years, the result of natural catastrophes, large-scale fires, water damage and numerous losses in the energy sector.
  • This loss experience, in concert with a decade of eroding marketing conditions, has reduced builders risk capacity in the London marketplace. Lloyd's, for example, has seen several syndicates exit the construction marketplace entirely.
  • The shift in market conditions is starting to be seen in increased underwriting scrutiny, a reduction in carrier appetite for projects with a heavy exposure to natural catastrophe, and/or unique means and methods (e.g., modular construction), an increase in rates, as well as tightening of terms and conditions (e.g., increased scrutiny regarding requests for the defective part via LEG 3, requirements for higher water damage deductibles, etc.).
  • Buyers should be alert to the likelihood of cost increases following a significant time lag between the initial pricing (quotation) and project inception. Pricing should be refreshed frequently, and insureds would be wise to prepare to pay more than initially indicated in the bidding process.
  • Buyers should consider alternative program structures to ensure optimization of risk transfer at an acceptable cost, e.g., increasing retentions, exploring cat carve-outs, etc.

Professional liability

The construction professional indemnity/liability market remains competitive, though domestic carriers are selectively making upward pricing adjustments.

  • Over a dozen carriers offer primary forms and several others provide either primary or excess coverage. Total U.S. capacity is now in excess of $300M with an additional $150+M available through London, Bermuda and other international markets.
  • For contractors' professional, we anticipate slight upward pressure on rates through the balance of 2019 and into 2020, with rates flat to +5%, depending on loss experience and carrier results. Many contractors have taken advantage of historically competitive market conditions and obtained increased limits with favorable terms.
  • Product enhancements reflect the evolution of technology, delivery methods and contractual terms and conditions.
  • Protective indemnity and rectification coverages are now included in standard forms offered by key carriers, but terms and limits must be carefully analyzed as they can vary considerably.
  • Defined technology services cover has become widely available in response to the growing exposure brought by technology to the professional liability space.
  • For owners' protective professional, increasing project values create a corresponding rise in professional liability risk, and many contractors and design professionals do not carry limits that adequately address these now larger exposures. As a result, owners are routinely purchasing owner's protective professional indemnity policies for further project protection.
  • Traditional project-specific professional liability policies covering all design risk on a job can still be obtained, but typically buyers prefer the cost efficiency that protective products provide.
  • Interestingly, we are also seeing increased interest in owner's protective professional for much smaller projects (down to $50M), driven primarily by market capacity and the product's cost effectiveness.
  • While construction professional indemnity/liability continues to be competitive in North America, there are some trends to watch over the next 6 – 12 months:
    • Increased claim activity in the professional liability market and the abundance of large projects over the past several years are lifting claim severity.
    • Some U.S. carriers are reviewing PL books of business and selectively reducing capacity and increasing rates depending on loss experience and class of business.
    • Hardening market conditions in London, Australia and the rest of the world may begin to impact U.S. buyers as global carriers try to recoup losses from outside the U.S.
      • Nine insurers exited from construction PI market in last 18 months, removing $130M of capacity.
      • Capacity is being restricted across the board and subscription placements are increasingly necessary, even for smaller clients. Capacity reductions by individual carriers on individual programs of between 30% and 50% are not unusual.
      • We are seeing increased scrutiny by underwriters on excess/SIR levels — insurers expect clients to have more skin in the game.
      • Some observers are concerned that market capacity in London may be exhausted before the end of the year.
      • Rate increases in Australia are ranging from 50% to well over 100% with increased retentions and capacity reductions.
    • General hardening in other lines of coverage as well as continuing year-over-year rate reductions may begin to impact capacity and rates.
    • Owners' protective project coverages, typically written by the same contractor professional markets, may have a negative impact on carrier loss experience as the market matures and projects reach completion.

Subcontractor default insurance

The subcontractor default insurance (SDI) market may soon see another entrant. The steady increase in capacity, now eight years in the making, has resulted in a competitive market in both pricing and terms for clients with positive loss experience.

  • Currently, six markets provide this coverage, with varying appetites and capacity of up to $75M per loss. A seventh market has recently hired a product leader with the goal of entering the market for 2020.
  • Given that SDI policies renew every few years, buyers at renewal can expect single-digit increases.
  • Recent losses have been led by residential risks, framing scopes and the generally high backlogs that subcontractors are holding — which are placing strains on subcontractors' ability to perform from a labor and cash flow perspective. These trends are expected to impact placements with frame or residential exposures, as well as any clients with adverse loss history.
  • The cost of tail coverage is increasing while terms are shrinking in many cases. Over the past 24 months, most of the carriers' coverage for tail has been shortened on a year-over-year basis from inclusive of 10 years to inclusive of two or three years post-substantial completion. We have seen pricing increases of up to 25% on an additive basis to maintain tail coverage of 10 years, while some markets are declining to entertain (even at a price) the full 10 years.
  • Residential risks in particular are seeing significant pricing increases for tail coverage and limited carrier appetite for tail over five years post substantial completion. Factors impacting coverage availability are loss experience, GL wrap limits, geography/jurisdiction and, of course, contractor controls, such as financial prequalification and project QA/QC.
  • Often, the largest subcontracts and/or most unique subcontracts with little performance history are being removed from the subcontractor default program due to selective bonding, carrier appetite or owner requirements.
  • Carriers are seeking increased transparency around financial qualifications, operational ability, subcontractor selection criteria and risk mitigation planning.
  • Overall, however, the subcontractor default marketplace is robust, providing contractors with multiple options. While we expect rates to remain stable — except for buyers that have not yet renewed their programs under the new tail pricing structures — the competitive landscape offers more choices than have historically existed for this coverage.
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