With January 1st re-insurance treaties negotiated and in place, and the losses from super storm Sandy still being tallied it comes as no surprise that rates for construction liability, construction umbrella, and construction workers compensation are seeing 30 to 40% increases in their insurance cost structures.
According to an article in Property Casualty 360, 56% of insurance buyers saw substantial increases in their umbrella insurance rates, with increases in both workers compensation and general liability lines of insurance not far behind.
Construction companies and projects in NYC saw by far the largest increases due to a confluence of events.
- From 2005 until 2011 carriers were bludgeoning each other with pricing wars which in the end leaves them with a construction risk portfolio that generates far more in losses than the premium they take in. This is called an adverse combined loss ratio. The combined loss ratio for the industry was 108.2 % country wide according to ISO (Insurance Service Office). For NYC construction that number can be as high as 140 contingent on what carrier you speak with. That means for every $1 in premium received for a NYC construction risk the carriers on average paid in excess of $1.40 in claims and related expenses.
- The excess carriers (Insurance companies that provide umbrella and excess liability) have seen huge losses in the this line of insurance when they attach over the first $1 million in coverage in the last several years. “They have been so underpriced for years in this market that most of the carriers left the space convinced they can’t make money” revealed Rina Visconti from CRC Insurance Services out of Jericho NY. Thus the few carriers that remain are pricing the next layer of excess over the $1 mill per occurrence $2 mill aggregate at 100% of the cost of the first layer from your base general liability carrier; sometimes more.
- Workers Compensation continues to be another line of insurance that continues to be challenged. Although Gov Cuomo has some interesting new initiatives as it relates to the NY Workers Compensation system, the reality is the cost benefits if any won’t be realized for several years.
- Construction companies that have significant exposure to NY Labor Law/Scaffold Law AND construction companies with adverse loss histories are getting punished severely with higher insurance cost in this market.
Some Quick Takeaways:
- Order your loss runs 6 to 7 months before your insurance renews to get a handle on if your account is profitable to the insurance market place or not. Have you broker run a loss pic. Anything over 50% is unprofitable to the insurance marketplace thus expect a substantial rate increase.
- Try and get some indications early on to avoid signing contracts with a cost basis that does not reflect your true insurance costs. Many times we see construction companies take on work, and their insurance cost structure changes leaving the job unprofitable. We suggest contract language that will adjust your project costs consistent with the changes in your insurance cost structure. Contact a Risk Advisor for that language.
- The liability carrier that provides the first million should be in a position to provide a 2nd million of coverage more cost efficiently than the excess market place.
- Make sure you have a strong risk transfer mechanism in place; not just a strong sub contract. It’s absolutely critical that your construction firm retain the services of a vendor qualification analyst like the RISK ROCKET to confirm your sub contractors are carrying good insurance. This ensures coverage is triggered and paid for by the sub’s carrier not yours. If your sub’s policy has exclusions kicking the claim back to you your cost will be very steep upon renewal.
While these insurance increases are challenging, past hard market cycles have shown that usually the result is less competition for the better construction firms. The ones with poor claims history become uninsurable or their cost structures become so high they can’t compete with best practice firms. Small solace I am sure, however I have seen this repeat itself twice in my 24 year career.