Insurance will cost more this year. In fact, the construction industry has been dealing with inflationary pressures for the past three years. The insurance industry has typically rotated from inflationary cycles to deflationary cycles as part of the competitive nature of the business.
The insurance business globally is part casino and part risk selection. When times are good, insurance companies compete aggressively for new business. Rate reductions soon follow. Over competition ultimately results in poor risk selection and inadequate pricing. Once financial results deteriorate broadly, capacity shrinks as companies exit unprofitable business segments. This is where we are today. What seems to be different this time is that we have layered onto this inflationary phase of the business cycle increasingly severe weather events, climate change and supply chain disruption. The industry is now looking for good clean business with focused risk selection and higher prices. In short, competition is flat. Insurance companies will continue to avoid non-standard business as they push for increased pricing in nearly all insurance lines this year.
There are three main things to consider when purchasing construction insurance. Firstly, does the coverage meet the requirements of the project contract or subcontract? Secondly, are the limits of coverage and deductibles reasonable given the risk profile of the buyer? Lastly, is the overall cost of the insurance acceptable given the potential profits for the business?
Often times, the insurance requirements for a project have been copied and pasted from another project with little thought about their appropriateness. While it is always best to clarify these requirements at the tender stage, there can be an opportunity to renegotiate these terms before the project begins. Reducing insurance limits and coverage can be a good way to lower overall insurance cost. ICBC has used this approach very effectively in the past year by shifting mandatory auto coverage to a no-fault insurance plan. This has reduced coverage, resulting in substantial cost savings through lower claims.
Raising deductibles can also be an effective way to reduce insurance costs. Insurance companies have also been using this as an effective technique to limit their exposure on accounts with small frequent claims while at the same time, keeping premium increases modest. We have seen them use this approach in condo insurance to lower strata insurance costs, as well as for roofers and highway maintenance contractors. Certain construction activities such as demolition, roofing, snow clearing and long haul trucking are attracting significant price increases. For those who dabble in these activities, it makes sense to analyze the profits earned from these activities in light of the new higher insurance premiums that come with this work.
The insurance business is composed of numerous layers of Insurance companies, re-insurance companies, finance companies, government regulators, brokers, wholesalers and various other parties who collectively influence pricing. This global network of companies, people and entities compete, interact and partner to create global pricing and coverage for a wide range of business risks. While not perfect, this approach has worked reasonably well for many decades.
Insurance is the grease in the machine that helps business grow and evolve. Recently, technology companies, called Insuretechs, have raised capital to build software and AI systems to capture some of the insurance business. These new players have found some success in the simpler insurance lines such as home and auto insurance. Their goal is to create a software algorithm that improves the risk selection approach of the current market. While it is not yet clear if they will succeed, they are certain to exert downward pressure on pricing in some segments.
Almost every large insurance company is also analyzing its data in hopes of deciphering how they can best select their clients to avoid claims. Many companies have increased their reliance on software solutions to assess risk. Many are relying much less on the complex network of interpersonal relationships that have historically helped shaped price and coverage in the past. Some skilled underwriters have been reduced to data entry clerks. Personal credit checks, used as an indicator of possible future claims frequency is one such approach. Interestingly, while some carriers rely less on their professional broker network, there has been a significant increase in the role of managing general agents, who in simple terms, are wholesale brokers for retail brokers. Insurance companies who sell their products through specialist MGA’s say they get statistically better claims results than if they used retail brokers.
Private equity is also snapping up smaller retail brokers in search of yield and economies of scale. Sometimes this results in lower service for clients. The insurance market is transitioning to a new way of doing business. It will be incumbent upon government regulators to make sure that these changes benefit all stakeholders.
While the rate of price increases seems to be slowing for many insurance lines, a return to a competitive and lower priced marketplace does not seem likely for 2022. This being said, the industry is complex and dynamic. New insurance carriers, products and players are constantly working behind the scenes, striving to create a better, less costly way to transfer risk. Construction insurance is not easy. As the industry changes and evolves, it has never been more important to use an experienced, knowledgeable, and adaptable insurance professional. Fortunately, nothing stays the same for long.
Steve McConnell, vice president construction services, is a veteran insurance and surety professional with the InsureBC group of companies.
