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Survey Report

Construction Marketplace Realities 2019 – Subcontractor Default Insurance

Financial, Executive and Professional Risks (FINEX)|Insurance Consulting and Technology
N/A

March 29, 2019

Overall there is a robust Subcontractor Default marketplace providing contractors with multiple options for carrier partners offering programs to suit their needs.

Rate predictions

  Trend Range
Subcontractor Default Insurance Rate Forecast: Increase +5% to +10% at program renewal

Key takeaway

Overall there is a robust Subcontractor Default marketplace providing contractors with multiple options for carrier partners offering programs to suit their needs.

The Subcontractor Default Insurance (SDI) market continued to expand in 2018 and carrier discussions point to further market entrants in 2019. Currently, there are six markets providing this coverage, with varying appetites and capacity of up to $75M per loss. We expect the increase in capacity seen through numerous market entrants over the past eight years to continue to support a competitive market from both a pricing and terms and conditions basis.

Industry losses for the product were not outside expectations in 2018, with losses continuing to be led by residential risks and generally high backlogs subcontractors are holding — which are placing strain on subcontractor’s ability to perform from a labor and cash flow basis. These trends are expected to impact placements with residential exposures or, especially, adverse loss history.

The other significant trend is the increase in the cost for tail coverage. Over the past 12-18 months, most of the carriers’ coverage for tail in particular has been shortened on a year-over-year basis from inclusive of 10 years to programs inclusive of two or three years post-substantial completion. We have seen pricing increases of up to 10-20% on an additive basis, to maintain tail coverage of 10 years with some markets declining to entertain (even at a price for the full 10 years the market historically enjoyed).

Outside of these trends, coverage for mega projects is also a dynamic market, with variability in pricing across markets. Due to the number of carriers now in the marketplace, these risks have more options for coverage than historically experienced, as long as they do not contain adverse risk profiles. Placement with appropriate limits and tail coverage is still an involved process, necessitating individual project underwriting by market and risk mitigation efforts by the contractor to meet the carriers’ expectations. Often the largest subcontracts, over $100M, or the most unique subcontracts where few have performance experience, are being removed from the subcontractor default program due to selective bonding, carrier appetite or owner requirements.


Overall there is now a robust Subcontractor Default marketplace, which provides contractors with multiple options for carrier partners offering programs to suit their needs. Obtaining coverage continues to require an extensive underwriting process, with carriers paying more attention than ever to not just financial prequalification procedures, but also quality management and operational controls in place. While we expect rates to remain fairly stable, unless a client has not yet renewed their program under the new tail pricing structures being seen, the competitive landscape provides a good opportunity for clients to broaden terms and conditions.


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