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Survey Report

Insurance Marketplace Realities 2020 Spring update – Construction

N/A
COVID 19 Coronavirus

May 7, 2020

In an environment made even more complicated by the COVID-19 pandemic, insurance buyers should consider proactive steps to control the narrative in the renewal process.
Rate predictions
  Trend Range
General liability Neutral increase (yellow line with purple triangle pointing up) Flat to +15%
Auto liability and physical damage Increase (Purple triangle pointing up) +5% to +15
Workers compensation Neutral increase (yellow line with purple triangle pointing up) Flat to +5%
Umbrella (lead) Increase (Purple triangle pointing up) +25% to +50%
Excess umbrella Increase (Purple triangle pointing up) +50% to +100%
Project specific builders risk Increase (Purple triangle pointing up) +5% to +15%
Master builders risk/contractors block programs (renewable business) Increase (Purple triangle pointing up) +5% to +20%
Professional liability Neutral increase (yellow line with purple triangle pointing up) Flat to +5%
Contractors pollution liability Neutral increase (yellow line with purple triangle pointing up) Flat to +10%
Project-specific/controlled insurance programs Neutral increase (yellow line with purple triangle pointing up) Flat to +5%; Flat to +5% for excess
Subcontractor default insurance Increase (Purple triangle pointing up) +5% to +10%

Key takeaway

In a construction environment made even more complicated by the COVID-19 pandemic, insurance buyers should consider proactive steps to control the narrative in the renewal process, improve their risk profile and open lines of communications with carriers.

Construction risk managers should consider several proactive steps.

  • Refresh any project insurance pricing indications/proformas received within the last six months to ensure viability of pricing.
  • Review contractual obligations and project schedules that could be impacted by the spread of COVID-19.
  • Control your own narrative in the renewal process by supplying more information.
    • Sharing the effectiveness and evolution of safety and quality programs can be a critical differentiator.
    • Be ready to assemble and share projected and historical exposures in greater detail and much earlier in the renewal cycle.
  • Consider off-cycle market meetings and loss control visits with potential alternative carriers. Waiting until the throes of a busy renewal date may not allow enough time for effective conversations.
  • Review and update (or implement) your driver safety program and document compliance and efficacy.
  • Wash your hands.

General liability (GL)

The spread of COVID-19 is expected to exacerbate the hardening market for construction, as significant declines in available labor typically give rise to increased losses in workers compensation and general liability. Carriers are bracing for a flood of inquiries about coverage interpretation, while insurance buyers can expect delays in project placements.

  • Future uncertainty aside, submissions to carriers continue to rise as many contractors are seeking alternatives to incumbent programs. Carriers are being highly selective.
  • While exercising significant underwriting scrutiny, carriers continue to pursue best-in-class risks, offering more flexible pricing and terms for attractive new business.
  • Wildfire exclusions remain prevalent and extremely difficult to remove from primary placements. Contractors have implemented a myriad of strategies, including alternative risk solutions, negotiating lower limits of liability attributable to losses arising from wildfires, and purchasing minimal limits of insurance to satisfy contractual requirements while saving premium. Contractors should be prepared to consider multiple options.
  • Adverse combined ratios are top of mind as underwriters analyze rate adequacy. Over the past few years, well-publicized challenges in auto liability have resulted in GL rates being suppressed as underwriters sought ways to offset auto rate hikes and keep total account pricing competitive. At the same time, rising legal expenses and unprecedented, catastrophic plaintiff verdicts are putting pressure on carrier portfolios. The window to discount GL has closed and we can expect greater underwriting scrutiny ahead.
  • Rising loss activity from premises and operational risk, historically overshadowed by long-tail completed operations losses, persists. Carriers are 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.

Auto liability

The market for automobile liability has begun to stabilize. While construction risk managers should still budget for rising costs, annual renewal rate increases are more in line with inflationary loss trend factors.

  • Since carriers have right-sized their commercial auto book of business over the past several years. we anticipate fewer extreme rate changes, although results are still challenged.
    • 2019 is the ninth consecutive year with a combined ratio in excess of 100 for commercial auto.
    • For the years prior to COVID-19 the strength of the economy put more vehicles on the road, increasing the frequency of accidents. Low unemployment rates translated into driver shortages, pushing companies to hire less experienced drivers — although the economic downturn sparked by COVID-19 may change some or all of that.
    • More claims are being litigated, with verdict outcomes often in seven or eight fi gures. Factors such as social inflation, third-party litigation finance, labor shortages and driver quality are all contributing to the explosive verdicts. One silver lining of the COVID-19 crisis is that the halting of state judicial proceedings due to social distancing is likely to delay civil litigation considerably. This may incent plaintiffs and their attorneys to settle cases rather than wait for a trial.
    • These strains are being felt in primary automobile liability markets and umbrella/excess liability capacity. Carriers are concerned when a single unit has the potential to cause a loss of $100M+. The first $25M is now a working layer on this line of business.
    • Overall, the umbrella marketplace is demanding higher attachment points, resulting in a stretching of primary limits or introduction of excess buffers.
    • Auto physical damage pricing continues to rise. Comprehensive and 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; in many cases minimum deductibles for light trucks have risen to $5,000.
  • Looking forward, there is opportunity to differentiate each risk and achieve a better result in the marketplace.
    • Insurers are underwriting on an account-by-account basis. Risks demonstrating robust driver safety programs, telematics, geofencing and other loss control initiatives are faring better than other risks.
    • Formalized fleet safety programs and telematics are becoming minimum expectations for submissions with large fleets (500 power units and above). Carriers will conduct a robust analysis of the technologies deployed, how the data is utilized and managed, and how metrics/results have progressed with deployment. The extent to which this can be captured and showcased in the underwriting stage directly correlates to success in the marketplace.

Workers compensation

Workers compensation remains steady for construction, as it does for other industry segments. However, we are experiencing a plateau in rate reductions and premium offsets against adversely performing lines of coverage. In addition, we expect the COVID-19 crisis will generate questions and likely impact this line of business.

  • Workers compensation continues to perform well in the aggregate; however, there are signals that construction could encounter difficulty ahead.
    • NCCI’s estimate of the 2019 workers compensation combined ratio is 87%, putting the result under 90% for the third year in a row (NAIC Annual Statement Data, January 6, 2020).
    • Average wages and overall employment had been increasing for construction, the fastest-growing individual economic sector (NCCI State of the Line 2019). The challenge of attracting and retaining construction workers persists, and the impact of COVID-19 remains to be seen.
    • Lost-time claim frequency had been decreasing steadily for nearly 20 years, except during the Great Recession (2008-09). However, accident year 2018 showed a relatively modest 1% decrease in frequency.
    • If contractors are forced to rely on less experienced employees, who are more likely to sustain injuries, we could see deterioration in results ahead.
  • Markets are still demonstrating a broad appetite for workers compensation construction opportunities, but program complexity continues to grow.
    • Carrier interest and competitiveness are markedly increased when worker compensation is included in the submission, particularly with casualty renewals.
    • Exceptions remain for certain states: California, Florida, New Jersey and New York. In New York, underwriters are especially guarded due to labor laws.
    • The notion of exploring alternatives should not just be about retentions and carriers. Investments in new or emerging pre-loss risk control strategies should be evaluated. Ergonomics, employee wellness, mental health initiatives — these programs can both improve workers compensation results and raise employee satisfaction and retention.
    • From a post-loss perspective, there are numerous questions to consider: Should you utilize the carrier’s claims handling? Should you consider a third-party administrator? Should the claims handling be structured on a per-claim fee basis, a flat fee or LCF multiplier? Claims mismanagement can impact workers compensation results for years, not to mention the company balance sheet.
    • Positive loss trends are mostly attributable to efforts by both the insurers and insureds to manage risk, including use of managed care, enforcement of return-to-work programs, nurse triage, fee schedules and telehealth. Buyers should be considering these options.

Umbrella/excess liability

The umbrella and excess marketplace for construction continues to harden. Contractors are experiencing significant rate increases and restrictions in coverages. We expect these conditions to continue throughout 2020 — likely exacerbated by the COVID-19 pandemic.

  • With significant increases in premium over the past year, carriers are now looking to drop down lower in excess towers to obtain a larger portion of premium. While perhaps increasing competition on lower layers, this makes higher layer placements much more challenging due to the reduced number of carriers willing to offer terms.
  • The allure of premium, however, has not increased the number of carriers willing to offer lead umbrellas.
  • Umbrella carriers continue to require higher attachment points. Primary general liability limits of $2M are almost mandatory. Primary auto attachment points of $5M (or more) are becoming increasingly common. Contractors should work closely with their brokers on primary program structure to assure the most competitive umbrella and excess terms are obtained.
  • Unsupported umbrella programs (where the umbrella market does not also write the primary casualty program) are particularly challenged.
  • Terms and conditions continue to be restricted. Excess wrap, once easily obtained, has become quite expensive. In-depth underwriting data (number of projects, limits obtained, historical carriers, loss experience, etc.) is now required.
  • Carriers often now demand anti-stacking endorsements in an attempt to limit their exposure across multiple insureds and projects.
  • Wildfire exclusions are prevalent, and capacity for coverage in high hazard areas (i.e., California) is virtually non-existent in the standard market.

Controlled insurance programs (CIPs)

Recent increases in reinsurance rates are driving up CIP pricing, and capacity has begun to diminish. However, markets remain competitive on most commercial business.

  • Requests from owners to lock in rates have increased through the first quarter of 2020. Programs that were placed in 2018 or the first half of 2019 likely show rates that are no longer achievable in the current marketplace. Underwriters are looking at all projects with greater scrutiny.
  • Negotiating competitive terms for more challenging risks is becoming problematic, particularly for residential projects and for projects in regions such as Florida and the Bay Area of California.
  • Clear and complete submissions with comprehensive detail are essential to obtaining competitive terms and conditions. On rolling programs, underwriters are requiring greater detail on the pipeline of projects.
  • Capacity is quite fluid. The practice of quota sharing higher excess layers is now being deployed in lower levels in an excess tower. Capacity is restricted in difficult construction defect (CD) states, especially Florida and California (the Bay Area).
  • Underwriting is becoming much more stringent. Carriers are changing their requirements and being increasingly inflexible. All subjectivities must be closely reviewed as they are becoming increasingly difficult to negotiate away.
  • Dual-line CIPs (GL/WC) remain stable, 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.
  • Extension requests, like subjectivities, are taking more time and attention. The COVID-19 pandemic will negatively impact project scheduling, requiring extensions. Extensions should be discussed with carriers immediately with anticipation of higher costs to the project.
  • Coverage remains mostly broad and consistent through the first quarter of 2020. Some changes have occurred specifically in the coverage available for condominium construction projects (i.e., course of construction (COC) exclusions) and how defense costs are handled. This trend began in 2019 and continues to accelerate as terms and conditions tighten.

Builders risk

The builders risk market, while generally competitive with abundant U.S. capacity, has shown signs of hardening in 2020 after many years of soft conditions.

  • Rates are incrementally firming for project and renewal business. Moderate increases should be expected for accounts with challenged loss experience or those with less desirable classes of business.
    • Wood frame continues to be an extremely difficult class of business, with several large losses in late 2019 and early 2020.
    • New entrants over the past couple of years continue to keep the traditional players in check by offering alternatives.
  • Carriers are scrutinizing terms and conditions.
    • Restrictive endorsements being sought by carriers include serial loss clauses (especially when LEG 3 is purchased), dewatering, pilings, LEG 3 sub-limits (faulty part), etc.
    • Deductibles are rising, but pressure is greatest on water damage. This continues to be a major industry issue, and we are seeing some carriers push for drastic changes, even on clean renewals without loss activity.
    • Underwriting information is being more heavily scrutinized in some cases and is having an impact on formal quoting procedures, including longer lead times for approval.
  • The reinsurance market has hardened faster than the primary/standard market.
    • This has caused issues for carriers trying to quote outside of their net and treaty guidelines with competitive terms.
    • Fewer 100% options are being quoted for heavy cat-driven placements; quota-share is becoming the norm.
    • Direct carriers that have significant facultative reinsurance on specific projects are being handcuffed on project extensions.

Professional liability

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

  • The good news: our last rate prediction in October 2019, flat to +5%, may have been slightly ahead of the market. Most rate increases have been coming in less than projected.
    • Total U.S. capacity is now in excess of $300M with an additional $150M+ available through London, Bermuda and other international markets.
    • While there is still significant capacity in the market, carriers are generally restricting capacity for any one risk.
    • Protective indemnity and rectification coverages are now included in standard forms offered by key carriers, but terms and limits can vary considerably.
  • The bad news: we do see continuing upward rate pressure and expect our prior projections to hold through 2020. Market conditions in London, Australia and the rest of the world remain challenging, with restricted capacity and continued price increases.
    • 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.
    • Uptick in claim frequency and severity continues. Relatively new coverages are creating increased claim complexity as well.
    • 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.
    • We continue to monitor the impact on U.S. buyers as global carriers try to recoup losses from outside the U.S.
  • There is continued interest in owner-procured professional indemnity policies for further protection on project risk.
    • Increasing project values create a corresponding rise in professional liability risk, yet many contractors and design professionals do not carry limits that adequately address these now larger exposures.
    • 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.
    • We are seeing an increase in protective rolling programs for owners as well.

Contractors pollution liability

With environmental claims on the rise, insuring a possible pollution condition at a job site is now seen as business-critical for contractors, owners and/or projects of all types and sizes. The marketplace continues to offer ample carrier choices supporting a broad appetite for risk; however, rates in 2020 are expected to tick upwards.

  • Regarding COVID-19 and contractors pollution liability coverage: Many policies are silent with regard to viruses and bacteria — although they may mention microbial matter with respect to mold and Legionella. Each carrier’s form needs to be evaluated for potential coverage.
  • It is predominately still a buyers’ market with respect to CPL coverage, fueled by more than 40 environmental carriers in competition.
    • These conditions have moved many carriers to differentiate themselves by both expanding coverage and competing on price, although this is abating.
    • Markets have also been thinking both holistically and strategically by joining forces with other lines of business to offer quotes for builders risk, professional, CIP, or even blanket practice programs where appropriate.
    • In addition, site pollution and contractors pollution wrap-up products are being coordinated to address both pre-existing and construction-related exposures of project sites on a more comprehensive basis.
  • The CPL market is showing signs of hardening for redevelopment projects (due to the high potential for the discovery or exacerbation of pre-existing pollution conditions) and habitational, hotel, hospitality and hospital risks (due to an increase in indoor air quality, mold, MRSA and Legionella-related claims activity).
    • Concern about environmental risk is rising due to several factors: pollution exposures during work and after completion, indoor air quality, Legionella, mold and water-related issues, application of chemicals, installation of building products, excessive siltation, emergency remediation expenses, contractor-owned locations and beyond-the-boundaries scenarios, and transportation and disposal of construction debris.
    • New liability exposures are emerging as well. Glyphosate (or other herbicide/pesticides) and polyfluoroalkyl substances (PFAS) are a concern at industrial redevelopment sites, resulting in exclusionary languages.

New York general liability

The market remains difficult, with significant adverse movement in the trade contractor space. Standard markets remain selective on new opportunities, seeking out best-in-class risks, although new capacity continues to enter the excess and surplus lines space for contractors.

  • Market activity and submission flow are up heavily as contractors exhaust all potential options.
  • New carriers may aim to capitalize on premium increases ranging upward from 50% premium-to-limit. Depending on trade classification, certain carriers are requiring 100% premium-to-limit on primary general liability.
  • Rate increases can be significant for contractors forced to restructure their primary and excess programs as incumbent appetites change.
  • While new capacity enters the New York marketplace for primary, excess carriers are reluctant to attach above newer players with little or no experience in New York, driving excess pricing further upward.
  • Historically, London markets have provided solutions when domestic carriers pull back. Due to poor overall results, however, London has reduced its available capacity and now demands higher rates and attachment points.

New York CIPs

  • CIPs remain a common solution to effect coverage certainty and unified terms and conditions on larger New York projects.
  • The minimum general liability retentions in New York remain in the $2M – $5M range, depending on project size and scope.
  • The excess space has firmed considerably due to limited global capacity for larger projects. Lead excess pricing (up to $10M per occurrence) continues to be a challenge with carriers seeking up to 100% premium-to-limit, depending on the project exposures.
  • Creative solutions feature pay-as-you-go options for both collateral and premium payments.
    • Bifurcated WC and GL programs offer reduced collateral, limited products-completed operations deductible exposure and potentially a lead excess option.
    • WC CIP placements remain relatively steady, with multiple carriers willing to participate on a stand-alone basis.
  • Project extensions have been challenging as underwriters are looking to reprice risk.
  • On mid-sized projects ($50M – $250M) combined owner-general contractor liability programs remain cost competitive for both commercial and residential projects.

Subcontractor default insurance (SDI)

Work delays and uncertainty resulting from the pandemic are likely to increase subcontractor risk and default. The reactions of SDI carriers have ranged from business as usual to the curtailment of capacity for individual subcontractor exposures and/or program commitment durations.

  • The subcontractor default insurance (SDI) market now has seven carriers with active programs, with five that we consider to be actively engaged and invested in the product line. Four of those five are now capable of offering single limits of $50M or greater per loss.
  • Given that SDI programs renew every two or three years, buyers can expect low single-digit annualized increases — which can add up.
  • Underwriting in the current environment is challenging; while virtual underwriting meetings may be acceptable for existing relationships, underwriters may be more skeptical of contractors who are altogether new to SDI.
  • Carriers will be seeking increased transparency around financial qualifications, operational ability, subcontractor selection criteria and risk mitigation planning.
  • The instant recession we are facing is likely to significantly increase subcontractor risk. The extent of default and failure often directly correlates with the steepness of economic downturns and recoveries.
  • Subcontractor qualification is especially challenging as 12/31/19 financial statements are in many cases no longer useful. For the near term, contractors will have to make special efforts to confirm a subcontractor’s financial, operational and safety capabilities. We expect contractors to consider a balance of SDI and subcontractor bonds to get through this period of uncertainty.
  • Before the pandemic, loss activity was moderate, with residential projects (framing subs specifically) being most problematic.
  • We suspect that wrongful default/termination decisions could be around the corner. We are advising insureds to proceed cautiously with regard to subcontractor defaults/terminations, making extra effort to observe the spirit of the policy and cut subcontractors some slack.
  • Financial interest endorsements may be hard to come by for SDI buyers. Underwriters will more critically assess the current credit quality of the insured.
  • Despite current uncertainties, the subcontractor default marketplace is robust. Markets are responding responsibly with some adjustments to their program offerings. The recent entrance of a new carrier offering significant limits, devoid of current market exposure, provides an additional option for both the near and long term.

Disclaimer

Each applicable policy of insurance must be reviewed to determine the extent, if any, of coverage for COVID-19. Coverage may vary depending on the jurisdiction and circumstances. For global client programs it is critical to consider all local operations and how policies may or may not include COVID-19 coverage. 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 and/or other professional advisors. Some of the information in this publication may be compiled by third party sources we consider to be reliable, however we do not guarantee and are not responsible for the accuracy of such information. We assume no duty in contract, tort, or otherwise in connection with this publication and expressly disclaim, to the fullest extent permitted by law, any liability in connection with this publication. Willis Towers Watson offers insurance-related services through its appropriately licensed entities in each jurisdiction in which it operates. COVID-19 is a rapidly evolving situation and changes are occurring frequently. Willis Towers Watson does not undertake to update the information included herein after the date of publication. Accordingly, readers should be aware that certain content may have changed since the date of this publication. Please reach out to the author or your Willis Towers Watson contact for more information.

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