Construction insurance market trends: USA

Builders Risk

Builder Risk

At the close of the first quarter of 2018 the U.S. property insurance market appeared to be rebounding strongly from the catastrophic events of 2017. While the hurricanes and wildfires of 2017 resulted in the U.S. property and casualty insurance industry posting a net underwriting loss of over USD 29bn, the strong capital base of the industry allowed most carriers to emerge in sound financial condition compared to previous catastrophe-driven years. Still, we experienced modest market hardening towards the end of 2017 which continued into 2018.

The Builder’s Risk market continues to suffer sizable losses which have been primarily driven by wood-frame construction fires. As a consequence of the losses some insurers have placed a moratorium on providing property/builder’s risk insurance coverage for wood-frame construction. As a result, capacity has begun to reduce and we are seeing rates increase as this sector of the industry moves towards a hardening market.

For the remainder of 2018, we expect property and builders risk opportunities to be scrutinised more thoroughly by insurers with modest single-digit increases expected for most placements. Clients with poor claims experience and/or high exposure to catastrophic conditions are likely to see firmer rates, retentions, terms and conditions.

Construction Liability

Construction Liability

While many carriers continue to experience a deterioration of their underwriting results, this is in the main driven by the catastrophic property losses from the second half of 2017. As a result  we do not expect a significant impact on liability classes. An ultra-competitive marketplace combined with a push for growth from top line carriers, a modest improvement in capital gains and reduced tax liabilities should ensure that this class of insurance remains a buyers-market.

Two exceptions to an otherwise favourable marketplace are risks associated with New York construction and For-Sale Residential construction.

  1. The continued escalation of loss costs related to New York Labour Law 200, 240 and 241, means that the cost of risk on New York construction projects continues to be several multiples of that in any other state in the U.S.

    Despite the recent influx of foreign capacity, market conditions remain extremely firm.

    While the volume of construction in New York has not slowed, the impact has been felt most significantly by the contractor community. For these risks insurance market capacity continues to shrink and some smaller firms have struggled to obtain meaningful coverage at an affordable cost.

    Some contractors have made a strategic decision not to insure this risk, instead only bidding on projects which are covered under a consolidated insurance programme (CIP).
  2. The residential market continues to be challenged – particularly in states with unfavourable risk climates such as California and Florida.

    Clients developing or managing residential construction projects should expect rates to become firm and coverage more restricted.

    The availability of insurance coverage for construction defect damage continues to be fluid as case law varies significantly across the different jurisdictions within the U.S.

Aside from the above exceptions, policies written both on an annual corporate programmes and individual project basis should continue to benefit from stable rates and broad coverage terms throughout 2018.

Auto Liability

Auto Liability

While other liability lines remain stable, commercial auto has continued to experience an increase in both claims frequency and severity. We expect that the 2017 results will show that the combined loss ratio for commercial auto industry will exceed 100% for the seventh consecutive year.

Distracted driving is a major loss driver in terms of both frequency and severity. It has emerged into an issue which all insureds must address in order to minimise their cost of risk. Clients with sizable owned or hired fleets are expected to implement and enforce formalised procedures designed to drive behavioural discipline around the risk of distracted driving.

The combination of medical inflation and the infusion of technology within automobiles have also served as catalysts for the upward pressure on claim severity.

Clients with average underwriting profiles and claims experience can expect to see modest rate increases in the mid-single digits for 2018. For contractors with large and/or heavy fleets, many markets are requiring clients to share in the risk by imposing larger deductibles. Although largely unfavourable, for clients who have been able to mitigate their exposures and produce better than average loss results it can be an advantageous strategy to minimise costs.

Workers Compensation

Workers Compensation

In May 2017, the National Council on Compensation Insurance (NCCI) reported a cumulative loss ratio of 94% for all private workers compensation carriers in calendar year 2016. This matches the 6% gain earned in 2015 and continues a trend of underwriting profit driven by reduced frequency.

Other key takeaways from the NCCI’s 2017 report include:

  • Average lost-time frequency across NCCI states declined by 4% in 2016
  • Average lost-time severity across NCCI states increased by 3% for indemnity and 5% for medical in 2016
  • The overall reserve position for the private carriers improved from a USD 7bn deficiency in 2015 to a USD 5bn deficiency in 2016.

While the 2018 report has yet to be published, we expect to see evidence of continued market softening.

With results continuing to trend favourably, market competition remains strong within the construction space. Contractors with disciplined safety programmes and clean loss experience in particular should realise meaningful savings in their workers compensation costs. As the construction economy continues to flourish, many contractors are investing in additional safety resources and electing to purchase loss-sensitive programmes in order to optimise their total cost of workers compensation risk.

Subcontractor Default

Subcontractor Default

With Hudson Insurance Group entering the marketplace in late 2017, the Subcontractor Default Insurance (SDI) market now has five carriers offering coverage. The product has significantly expanded with the introduction of additional capital.

In addition, there has been a standardisation of SDI as the preferred subcontractor default risk management method among project owners and the lending community. Together these factors have created continued growth in the SDI marketplace.

This is all good news, however There has however been significant losses experienced for this class of business. This recent (the last two to three years) Loss activity in the last two to three years has impacted the appetite and approach by Zurich (historically a lead market). This has influenced the behaviour of the other insurers.

Zurich reconsidered the policy wording, tightening the language to more clearly define the coverage and exclusions. The new wording puts more onus on the construction manager to follow the procedures as they presented during the underwriting process.

While the other three markets have not adopted Zurich’s approach in totality, they are making subtle shifts to their pricing, terms and conditions. In this environment it is more important than ever to evaluate the insurers’ underwriting philosophies, policy forms and claim paying history when considering insurer options.

As this class of business continues to evolve, the coverage may change, the terms/conditions could shift and pricing may look different, but the overall value creation SDI delivers to well-managed construction managers means we expect it will remain a valuable risk transfer tool.



The surety market continues to be soft with ample capacity available to support a contractor’s needs in a favourable underwriting environment. 2017 represented the 12th consecutive year of profitability for the industry in the surety product line. This positive loss experience has attracted capital and has allowed existing players to increase their capacity. These dynamics have resulted in increased competition for quality business.

Despite the favourable loss ratio over the past decade, recent domestic and global surety losses have exceeded traditional probable expected loss models resulting in higher dollars being spent to remedy contractor default claims. This is undoubtedly the result of the heightened construction activity and labour shortages impacting the pricing for completion contractors. If this loss trend continues, it could impact the pricing of surety. There is nothing on the horizon, however, which suggests any material change to the underwriting dynamics in the surety market for the next 12-18 months.