Construction Insurance Capacity Falls, Industry Risk Management Rises

A few years ago, it was a buyer’s market for construction coverage. But as happens in insurance, things have changed, and today the construction industry faces a hard market — there’s limited availability for insurance, with contractors often fortunate to get a single quote or coverage at all. 

The hard market has direct consequences on contractors and construction companies’ ability to accept jobs: No insurance equals no work.

Because of cyclical nature of the insurance market, it may appear there’s little to be done except to tighten belts with the prospect of fewer jobs. However, contractors that minimize risk make themselves more appealing to insurers and improve their prospects of getting coverage.

The hard market’s impact on construction

A hard insurance market occurs when premiums rise and the amount of coverage carriers will underwrite falls. The limits on coverage, or capacity, cause issues for contractors in every type of insurance they need.

For instance, consider insurance for frame construction. Not only have lumber prices quadrupled in the past year,¹ but contractors are competing against other contractors as well as businesses in other industries to get coverage for frame structures.

And the market for insuring builder’s risk, which protects property during construction, has shrunk dramatically: A year and half ago, 15 carriers wrote this coverage, but since the number of market options has steadily decreased in both the U.S. and Canada.

Lowering risk at the beginning

A good starting point to manage risk is in a project’s design stage, well before breaking ground. Decisions at this point can make a difference in both the long-term safety of the job and the project’s insurability.

For instance, take the following decisions in regard to building materials:

• Fire is a major risk with frame construction. Issues like durability and wind resistance need to be considered from the outset of each project. Rising lumber and insurance costs should make consideration of alternative materials a priority.

• While steel adds 3% to 5% to the cost of a project, it’s not a combustible risk like wood frames, which can cost as much as nine times more than steel to insure. Savings in insurance can be far greater than the added costs of using metal supports.

• Cross-laminated timber is flexible but not rigid, and strong enough that it can be used for 20- to 40-story buildings. It’s more fire resistant and cheaper than wood or steel. The insurance market has been slow to accept cross-laminated timber, but underwriters are starting to take notice of this innovative construction material and other ways to reduce risk. 

• The global market for modular construction is expected to jump 70% from 2020 levels to $173.44 billion in 2027.² Modular construction done in controlled environments improves safety and productivity and can save in materials costs. However, modular construction can fundamentally alter project risk and insurance.

The insurance capacity issue shows no signs of relenting. For better or worse, it’s forced contractors to make their businesses safer, more profitable and an attractive opportunity for insurers.

Insurance brokers can help construction companies implement best practices to minimize risk and procure coverage in a tight market. This can help bring existing carriers back to the table and attract new markets as well.

Contact HUB International’s construction industry specialists to learn more about managing risk in a hard insurance market using risk management services that mitigate, transfer and avoid risk where possible, presenting construction companies to insurers as best-in-class risks.

¹ Fortune, “No relief for DIYers: Lumber’s retail price hits all-time high—up 323%,” May 24, 2021.

² GlobeNewswire, Global Modular & Prefabricated Construction Market Is Expected to Reach USD 173.44 Billion by 2028 : Fior Markets, February 4, 2021.