Minimizing insurance costs in an increasingly expensive market

Companies able to suffocate the top risks in their claims data, have the best opportunity to minimize the impact of the current hard construction insurance marketplace. PHOTO: Adobe Stock/Andrey Popov

Most stakeholders within the construction sector have likely noticed the cost of their insurances has gone up, in some cases, significantly. This has no doubt been concerning, especially when you consider the uncertain times we are all facing.

Unfortunately, the global insurance market is experiencing what is known as a “hard market,” which is a period of reduced insurance capacity and thus, rising prices. Prime contributing factors to this hardening of insurance terms are both macro to the entire insurance sector and micro to the construction insurance sector specifically.

At a macro level, the frequency and severity of catastrophic events over the past several years has grown significantly and has had a substantial contributing impact on the entire insurance capital base. In addition, the lower than expected returns from investments have also contributed to a growing demand for more rate increases. In the past, insurers could use returns on their float — or their premium holdings — to make up for shortcomings in their underwriting results, but had not been the case in recent years.

From a micro perspective within the construction insurance marketplace specifically, insurers are experiencing significant losses in three out of the core six construction insurance product lines, namely, property, casualty (or liability) and professional liability. The results in the professional liability insurance market have been particularly poor, which has led to a significant reduction in capacity for that insurance product, and thus substantial price increase for that product to all professional liability product classes.

So what strategies can you implement to minimize the impact of the current hard insurance marketplace on your company’s or project’s financial future?

The first, and perhaps most important, step you can take is getting a clear picture of how well you stack up in comparison to the rest of the construction marketplace when it comes to your ability to manage risk. Your claims data is the best source of information for evaluating how you measure up. You and your advisors should perform an in-depth review of the claims results from both your practice policies and any project specific policies you were insured under. Your losses will very likely be the primary area of focus for insurance underwriters when they look to determine the terms and pricing you will receive for any insurances you want to obtain.

In essence, it is pretty simple. If your losses over time have left the insurers paying out more in claims and underwriting administration, you can expect to be amongst the hardest hit on pricing and term restrictions for any future insurance placements.

By doing an in-depth review, you can get an idea of what your future insurance terms will look like, but it will also prepare you to help insurance underwriters better understand why those losses occurred and, most importantly, what you are doing prevent and mitigate future losses. A full claims review prior to any practice policy renewals, or project placements, is absolutely worth the time and energy.

Perhaps even more important than analyzing your loss results, however, is getting a firmer grasp of the risk controls you could implement to prevent and mitigate the top losses evidenced in your past insurance claims history. The following represent a brief and select overview of some risks controls you might consider utilizing (top risk controls appear in bold):

Contractual Risk Controls

• All project stakeholders should seek to find ideal risk allocations in their contracts
• Greater collaboration is needed amongst all project stakeholders (consider utilizing collaborative practices or procurement models)
• Move to a total cost of ownership procurement process vs. the current total cost of construction model currently used (cost over the life of the asset far exceed cost of construction and that should be strongly considered in procurement)
• Assess and prequalify your fellow project stakeholders — owners, design, joint venture partners, contractors, subcontractors, suppliers, finance and advisors

Operational Risk Controls

• Ensure you have a strong “go or no-go” process when considering future projects
• Implement best-in-class subcontractor and supplier risk management practices
• Consider using peer review as much as possible (design and subcontractor/supplier)
• Have your safety program reviewed to ensure best-in-class status
• Ensure you have a strong QA/QC protocol and ensure it is tied to administration/accounting/payment processes
• Make money — profit now as opposed to optimistic profit later

Technological Risk Controls

• Develop a strong data strategy which evidences your organization’s ability to continuously improve
• Ensure you have a deep understanding of all technology solutions available to manage top risks and optimize them to best suit your company/project
• Utilize predictive bidding and scheduling technologies to aid in “go or no-go” decisions
• Harness the power of job site IoT technologies for real-time awareness and predictive warning

If you configure your risk controls to suffocate those top risks identified in your claims data, you have the best opportunity to minimize the impact of the current hard construction insurance marketplace. Show the insurers you know where you need to improve and that you have taken the necessary steps to make the improvements.

David Bowcott is Global Director — Growth, Innovation & Insight, Global Construction and Infrastructure Group at Aon Risk Solutions. Please send comments to editor@on-sitemag.com.

This column first appeared in the February 2021 edition of On-Site. Click here to read through the entire issue.