| Trend | Range | |
|---|---|---|
| General liability |  |
+5% to +15% |
| Auto liability and physical damage | |
+10% to +15% |
| Workers compensation |  |
Flat to +5% |
| Umbrella (lead) | |
+5 to +15% |
| Excess | |
+10% to +15% |
| Non high hazard NATCAT project builders risk | |
+5% to +10% |
| High hazard NATCAT project builders risk | |
+10 to +20% |
| Masters builders risk/contractors block program (renewable business) | |
+5% to +10% |
| Professional liability | |
Flat to +5% |
| Contractors pollutions liability | |
+5% to +10% |
| Subcontractor default insurance | |
Flat to +5% |
| Project-specific/controlled insurance programs | |
+5% to +15%, +10% to +30% for excess |
Markets are well positioned and comfortable with deployed capacity, attachment point and overall diversification of portfolio. The general market consensus indicates that the global blended risk-adjusted reinsurance renewal rates came in around flat this past January, with ample capital to support market demand at the terms and conditions of 2023. Swiss Re Global CAT Bond Performance Index reports investor interest in CAT bonds providing double digit returns of almost 20%, creating a more profitable reinsurance environment.[1]
Though the construction industry continues to struggle with labor shortages, supply chain issues, increased claim costs and uncertainty around interest rates, the market corrections of the past few years have contributed to improved insurer combined loss ratios and a more stabilized rate environment. The challenge for contractors and their broking partners is to try to counterbalance the market’s continued upward rate pressure due to inflation, litigation expense and the continued rise in nuclear verdicts with each individual account’s own loss experience and risk mitigation strategies.
Adverse incurred loss development is evident in auto liability from 2015 to the present and in general liability from 2016 to 2019, with 2019 showing the least favorable year for both lines of business. Additionally, in a Marathon Strategies publication, corporate nuclear verdicts (i.e., more than $10 million in loss) appear to be already trending toward the spike of 2019.[2]
Auto liability and lead umbrella product lines remain a challenge with the first $10 million in limits often deemed the “working layer.” However, new market entrants competing in low to moderate risk profiles and/or higher excess layers has put pressure on incumbent/competing markets and contributed to more favorable rate results. As some of these new entrants gain market share and further expand appetite, we expect to see increased competition that should assist in further mitigating rate need.
Higher hazard risk groups (construction) remain outliers to industry trends with limited market appetite for high severity risk, often subject to increased rates and retentions with capacity constraints. We find contractors in this space curious about alternative risk transfer options and captive solutions. Early communication and an effective marketing strategy is critical to ensure proper expectations are both set and met. The most successful outcomes often include contractor participation in the process.
More than ever, contractors are focused on employment and hiring practices to attract and retain talent. They are investing in training and development to ensure all employees are equipped with the proper knowledge, resource, tools and techniques required to effectively deliver a defect-free project safely and on time. Though the construction industry has typically been a slow adapter, there is increased interest and investment in technology to bridge labor shortage gaps, realize operational efficiencies and capture data in a more meaningful way. The larger and more sophisticated contractors are investing in technology to mitigate loss, and they are relying on data analytics and key performance indicators to better drive performance outcomes and create a more favorable risk profile. Contractors are leveraging all resources and leaning on broker/insurer partners and peer groups for industry trends and pitfalls.
We expect a more prevalent use of technology and anticipate increased use of drones, wearables and robotics. Additionally, we see artificial intelligence and robotics gaining traction as contractors keep pace with growth goals and succession planning in a labor-challenged environment.
As a final point, and a continuation of 2023, we anticipate significant construction activity will continue through 2024 primarily in infrastructure (roads, bridges, airports, alternative energy), renewable energy, industrial manufacturing, (semi-conductor chip plants, EV battery plants, data centers and distribution facilities) and healthcare (hospitals). As such, we expect to see more joint venture arrangements and alterative contract types, such as P3 and EPC contracts.
The umbrella/excess market has steadily stabilized over the last few years, and we see that trend continuing for insureds with low-to-moderate risk profiles and favorable loss history. Supported lead capacity continues to reduce competition and drive the most compelling results. Additionally, increased attachment points and year-over-year rate increases have invited market competition for low/moderate hazard classes, often driving down costs. Exposures often contribute to rate adjustment as well. With increased exposures and favorable loss experience, contractors may see flat or decreased rates, whereas if insurers appetite is reduced and/or capacity reduced in the tower, rates may creep to the mid-to-upper single digits.
For high hazard risks, including contractors with large auto fleets, New York construction operations, for-sale residential, wood-frame construction, wildfire exposed utility work and trades that participate in demolition, curtain wall and foundation work, the umbrella/excess market is significantly more limited, particularly for insureds that have a history of losses in their excess layers. Construction activities with these risk profiles will continue to see rate increases through their excess tower.
From a coverage perspective, market capacity remains limited for excess and difference in conditions wrap coverage. With ISO releasing several new endorsement/exclusions in December of 2023, we are seeing insurers adding several additional cyber exclusions, which also exclude bodily injury and property damage coverage from those cyber incidences. This is a real conundrum in that cyber insurers are not giving much, if any, bodily injury and property damage coverage (note: the WTW CyCon product provides sub limited coverage). With the continued development of remote access and control of systems and equipment, there is a real possibility that cyber hacks could lead to claims that are much more expansive than data or information systems and could result in bodily injury and property damage, leaving insureds with a gap in coverage.
PFAS exclusions (perfluoroalkyl and polyfluoroalkyl substances) are becoming more prevalent as well. In some instances, we have been successful in removing or modifying the exclusion, but often, insurers are not willing or able to negotiate/remove it.
The builders risk market for commercial construction has generally started to show signs of improvement coming off a hard adjustment period in 2023. Rate increases should still be expected, but not as adverse as the prior year. There are signs more capacity is available in the marketplace, indicating treaty reinsurance renewals have been positive. Quota-share structured deals are more common on larger risks and the perils of wildfire and severe wind continue to be heavily underwritten. New challenges have emerged around LEG3 coverage due to recent U.S. case law. We anticipate additional restrictions to the coverage and expect most of the market will be modifying their current policy language. The wood frame market’s available capacity has been consistent; however, appetite is dependent upon robust security and risk mitigation efforts. Finally, nat cat capacity, both primary and excess, remains limited, as the market continues to recover from a difficult 2022.
Project-specific programs/controlled insurance programs (CIPs)
Construction project insurance is facing a range of challenges and opportunities as we get into 2024. We are seeing:
Large contractors and big tech owners will continue to benefit from the construction boom of mega projects. Sites including multi-billion-dollar semiconductor manufacturing plants are becoming more of the norm than the anomaly.
These projects, boasting construction values never before seen in the insurance space, are causing the markets to reevaluate risks and are setting new precedents in primary and excess liability rates. We are therefore enjoying a decline in project insurance pricing compared to the past few years.
While the Infrastructure Investment and Job Act has poured over $400 billion for over 400,000 projects into the marketplace since being signed into law two years ago,[3] there is a trending decline in certain areas of new builds. Particularly, there has been a decrease in the construction of new office, retail, hotel and warehouse projects.
These projects are often more favored by the insurance markets because of their low level of complexity. Without the counterbalance of these “vanilla” placements, the markets are requiring more detailed submission information before underwriting the current complex risks.
Labor shortages and hiring struggles continue to be a challenge on construction project sites. The Associated General Contractors of America (AGC) reports that most construction firms are struggling to fill the open labor positions for their new projects.
This is also driving insurance companies to require more details around hiring procedures, labor filling and vetting of a quality workforce. Contractors prepared with details around these procedures will attract more market appetite.
Finally, the supply chain disruption and material pricing volatility seem to be easing. However, contractors and project owners who were previously affected by these issues are now insisting on pre-negotiated rates and extensions for their project insurance to address the potential risk of project terms being extended. While long-term market partners are mostly responding with favorable options, we are seeing a decrease in willingness to extend project programs.
In summary, on the project side, the entrance of mega deals into the marketplace over the past year have tilted the rates on projects with over a billion in projected construction value to obtain very competitive rates and incredible terms.
Auto liability continues to be a challenge across all industries. Despite the National Highway Traffic Safety Administration's (NHTSA) report of decreased traffic fatalities in 2023 with more miles driven, the insurance industry still faces unprofitability.[4] A report from The Insurance Institute found that auto losses rose 15% since 2020 while premium fell 13%.[5] This is a clear indicator that claim severity has dramatically increased since 2020. Social inflation and increased cost of materials continue to play a more prevalent role in adjustment of auto claims.
The general liability market has remained somewhat stable for many contractors. Supply chains have slowly caught up to demand which has relieved the pressure many contractors felt in considering the use of alternative building materials and methods. There is still ample interest in exploring opportunities such as modular construction and mass timber in geographies with growing populations. However, with the returned strength of the supply chain, contractors are less inclined to take this risk when timelines and budgets are more predictable, similar to the umbrella/excess, cyber and PFAS exclusions which are routinely included in renewal programs.
Workers compensation has prevailed as the most predictable, consistent and secure line of business, outperforming other major lines in the property and casualty insurance space. Though loss trends continue to reduce state rate classifications, increased labor costs may have a counter-effect on overall reduced costs. Additionally, higher claim costs and increased litigation in California, New Jersey and New York are having an overall impact on insurer rating methodology.
The construction professional liability market remains competitive, with stable rates for most exposures. Insurers continue to exercise caution about capacity deployment and retention levels for both practice and project policies.
Significant total capacity available for most contractor risks.
Adequate capacity and continued competition generally keeping rate increases minimal compared to other property and casualty (P&C) lines.
Most coverages available from most insurers, with some variations in approach to certain coverages.
Many markets reserve project-specific capacity for clients who procure annual business.
New York controlled insurance programs (CIPs)
Pricing and program structure make it difficult for wrap up programs to make sense except for very large projects or those that are part of rolling programs.
We are seeing less high-rise residential construction in NYC.
NY Labor Law 240(1) continues to make NY an undesirable state for insurance insurers.
The use of alternative dispute resolution continues to gain momentum and is being used on several large projects in NYC and Upstate NY.
Interest rates and insurance premiums are correlated, meaning changes in interest rates can impact the profitability in the insurance marketplace depending on the specific circumstances and context. Insurance companies invest their collected premium to produce additional investment income which can be used to pay claims and expenses. Due to regulated investing requirements, insurance companies make substantial investments in such fixed- income securities as bonds and treasury notes. There is also the issue of bond premiums having an inverse relationship with interest rates, so if an insurance company needs to liquidate their bonds the yield could be reduced.
In contrast, reinvestment risk is introduced when interest rates rise. Insurers that have previously invested premiums in low-yielding, fixed-income securities may be missing additional profitability on higher-yielding securities, while they wait for their current assets to mature. As a result, insurance companies’ investment income may be deferred so premium savings may not be immediately realized. Interest rates also have an impact on the calculation used to model the value of future claim payments. Reserve amounts calculated at present value are lower when interest rates are higher, resulting in lower reserve requirements and additional profit for insurance companies.
Although there is greater capacity in the market, particularly for well-performing insureds, incumbent partners are often willing to make compromises on pricing and terms to retain valuable clients and deter a marketing effort. Familiarity plays a lead role in underwriting flexibility when analyzing insureds’ exposures. Therefore, incumbents have an advantage in retaining long-term clients.
It is important to give adequate lead time during renewals, especially when introducing new markets to an insured.
Subcontractor default insurance continues to experience growth throughout North America. With sustained financial stress impacting the subcontractor market and increases in project complexity, owners, developers and GCs alike are looking to SDI programs to provide adequate limits. With larger and more complex projects lining up in 2024, the SDI market is continuing to provide increased limits, proper terms and adequate coverage to ensure SDI programs continue to meet the specified demands and needs of clients.
Environmental exposures in the construction industry persist and are expanding.
The Canadian construction insurance market. especially on the wrap up liability side, is continuing to see increased interest from the domestic insurers driving competitive outcomes on project placements along with enhanced coverage opportunities such as rip and tear.
On the builders risk side there is continuous emphasis on good, comprehensive underwriting information, which can unlock capacity and expedite the underwriting process. The overall outlook continues to be stable for Canadian project placements.
The Canadian construction sector has cooled down, however, more on a temporary basis as interest rates continued to increase back in 2023. As inflation and debt markets stabilize, we expect new projects, especially in the private sector, to move ahead in Q2 and onward for the remainder of 2024. The continuous need for capital infrastructure projects along with residential and affordable housing projects across Canada will continue to drive work for contractors and trades in 2024.
Our Canadian construction team is actively watching the recent 2023 Supreme Court case R. v. Greater Sudbury (City). This case highlights the increased health and safety responsibilities owners have along with their increased liabilities associated with project sites. Discussions with our owner clients around adequacy of wrap up limits that are being purchased on given projects along with review of contractual requirements are at the forefront.
Willis Towers Watson hopes you found the general information provided in this publication informative and helpful. The information contained herein is not intended to constitute legal or other professional advice and should not be relied upon in lieu of consultation with your own legal advisors. In the event you would like more information regarding your insurance coverage, please do not hesitate to reach out to us. In North America, Willis Towers Watson offers insurance products through licensed entities, including Willis Towers Watson Northeast, Inc. (in the United States) and Willis Canada Inc. (in Canada).
