Insurance for the construction sector is already in a tough position. Supply is shrinking, but demand is rising as the economy advances in the late-COVID environment. Insurance capacity for residential homebuilders risk and excess liability are constrained following some large surety losses, and prices are rising in line with almost all other classes of business insurance.
If the current bipartisan White House proposal to spend $1.2 trillion on U.S. infrastructure goes ahead — or even a bill for substantially less — the dynamics of the market will have to change dramatically if we’re to get all these projects covered.
Capacity for major public construction projects is already in short supply because many insurers that traditionally have led in the space have dramatically reduced their appetite for such risks. Some have withdrawn, others have reduced the share of any given risk they are willing to insure.
Carriers that have historically been dominant are still present, but they’ve scaled down the availability of their capacity, the Terms & Conditions they apply, or both. Various Lloyd’s syndicates have also participated in many major U.S. construction risks, but the market’s new “performance management” regime means it’s reasonable to presume appetite will be shrinking there too.
With no sign yet of these changes being reversed, finding adequate cover for a trillion dollars worth of projects will not be easy. That said, the market environment may be at least somewhat different when the projects actually come on line, which for most will take a few years at least. By then, some of the traditional players may be willing to release more capacity to construction, and new players may have joined their ranks.
Supply on the contractors side is also likely to be constrained, which could have a noteworthy impact on risk profiles. The number of builders who can construct a high school or even a stadium is ample, but those able to properly manage the creation of a suspension bridge or a hydroelectric dam is much fewer — and that number takes a long time to rise.
The workforce is another issue. One of the most common reasons for subcontractor default is their inability to obtain the semi-skilled human resources necessary to complete a project on time. A massive construction boom in already tight labor markets will strain the labor supply even further. Any shortage in the supply of contractors or workers could lead to lower standards on the job site since the less skilled are likely to head towards the money. That would obviously increase the risk profile.
Another trillion-dollar risk is a decrease in the quality of licenses, inspections, and certifications. The federal money will trickle down through the spectrum of states, counties, and municipal authorities, all with different minimum requirements for contractors and construction. That creates the real danger that some projects will be built to standards that may not meet up-to-date best practices. Insurers surely have a role to play in monitoring this potential risk.
Even when standards are adequate, the ability of some local authorities to oversee the work may be called into question, especially over a mega-project. San Francisco’s leaning, sinking Millennium Tower is an example of multiple failures in protocols and safety practices involving various parties. New building materials present many challenges for engineers, building inspectors, and contractors seeking to mitigate supply chain challenges and new environmental requirements.
These materials shortages combined with the federal infrastructure spending-spree could exacerbate the risk of losses of the type seen in Boston’s ‘Big Dig’ tunneling project. There, inadequate adhesives have been blamed for a fatal ceiling-panel collapse in one tunnel section, while faulty concrete products led to legal actions and even criminal convictions.
Despite potential changes to the loss profile, we will see new participants in the construction insurance market who bring access to different capacity. It is not yet clear where that capacity will come from, but it is certain the players are changing. That highlights another shortage: underwriting talent. Our industry’s shrinking appetite for difficult risks has led to a dearth of adequately trained underwriters, which has a knock-on effect of stifling innovation. Algorithms don’t look for solutions.
The result of all this is likely to be a decrease in bespoke, custom insurances tailored to suit large, unique construction projects and a rise in the amount of risk that insureds are forced to assume. They will have to accept standardized policies with little special coverage. In short, they will face a narrower selection of modular products, a trend already underway in the residential construction market. To navigate this much-changed insurance market, general contractors will have to work closely with specialist brokers to take advantage of the bespoke solutions and knowledgeable underwriters that remain.