The Rebound Continues as Contractors & Builders Expect to Grow Again in 2016
Builders and contractors can expect another year of steady growth in 2016 and so can the insurance specialists that serve this rebounding market.
The construction industry across the board is seeing strong growth, says David Marino, U.S. construction leader for Marsh.
“Growth in the construction sector has well-outpaced U.S. gross domestic product,” Marino says. “We are at the highest level of construction spending since 2008, some $1.1 trillion.”
Construction spending in September reached a new seven-year high and climbed at the fastest rate since early 2006, according to an analysis by the Associated General Contractors of America (AGCA).
“Overall demand for construction continues to grow at a very robust rate,” said Ken Simonson, the association’s chief economist. Spending in September totaled $1.094 trillion at a seasonally adjusted annual rate, 0.6 percent higher than the August total and 14.1 percent higher than in September 2014, Simonson said.
AGCA reported that the total was the highest since March 2008 and the year-over-year growth rate was the strongest since January 2006, indicating a faster pace of construction spending overall.
“The construction industry is rebounding,” adds Tony Page, senior vice president in Lockton’s San Francisco office, who directs Lockton’s construction and surety brokerage team.
While construction’s rebound has been occurring for a couple of years in some sectors and geographic regions, Page says he sees rebounds occurring in just about every region and sector of construction these days.
Page has seen growth for mixed-use and multi-family projects nationwide. “In the West Coast, the Southwest, Southeast, and even on the East Coast,” he added.
Page and Marino both saw construction projects trend up in healthcare and higher education in 2015 as well.
But Marino added that much of that growth – such as in mixed use, multi-family, healthcare and education – would have occurred in a good or bad economy.
In today’s improving economy, contractors and builders are seeing even stronger growth in just about all areas, including manufacturing, lodging and commercial building. That’s a trend Mario expects will continue.
The only area, in Marino’s view, to experience some fall-off has been in the energy and power construction sectors.
The signs of recovery are everywhere, the experts say, and all indications point to more in 2016.
According to the 2016 Dodge Construction Outlook, published in early November by Dodge Data & Analytics, a mainstay in construction industry forecasting and business planning, total U.S. construction starts for 2016 will rise 6 percent to $712 billion, following gains of 9 percent in 2014 and an estimated 13 percent in 2015. This growth is leading to a healthy market for the insurance brokers and carriers writing construction business.
Geoff Heekin, executive vice president with Aon’s construction services group, expects the new year to bring moderate growth for contractors and builders. “On a whole we anticipate seeing North America having growth of between 4 to 6 percent overall,” he said.
“Clearly things are looking up,” says Mike Farrington, assistant vice president, underwriting for CNA.
Next year will bring more positive results, Farrington says. He adds that a good predictor of future growth in construction is what design professionals are seeing right now – backlog.
“We’ve heard from some of the design professionals out there that they are starting to see backlogs and when design professionals start to see backlogs that usually means that construction (building) is right around the corner,” Farrington says.
Insurance market conditions look good for the construction sector’s burgeoning growth, the experts say.
Lockton’s Page says there are a number of new players entering the construction insurance market which makes today’s market a good one to get the best coverage at the best price for clients.
“There’s a lot of competition,” Page said. “Rates are soft on pretty much all lines of insurance and we are looking at decreases” on many accounts.
Many contractors and builders today are seeing rate reductions at 20 percent, said Tom McCall, executive vice president in Lockton’s Irvine, Calif., office. McCall, who leads Lockton Southern California’s residential construction team, has represented residential developers and contractors in the western U.S. region for more than 30 years.
McCall says he’s been able to negotiate longer term contracts with insurance carriers on many construction accounts, which is leading to better profits for his clients. “When more money is in the market the terms and conditions get a little more flexible and negotiating longer term contracts” with carriers becomes a bit easier, he adds.
Marino expects to see even more new entrants into the construction market next year for primary casualty and perhaps property and excess liability as well. But one tough spot remains insuring projects in New York for liability, particularly around lead and excess liability, he said. “But for the balance of the market, pricing continues to be flat or slightly up or slightly down depending on loss experience,” Marino said. “We do see some medical inflation in workers’ comp and auto which pushes some inflationary pressure on those lines.”
Marino says one potential issue he has his eye on involves two of the biggest players in the construction market – AIG and Zurich. “Both are going through some re-underwriting and that may have some challenges going forward,” Marino said
Aon’s Heekin describes the construction insurance market as “competitive but not irrational.” While he has seen some traditional or “legacy” construction markets pulling back in some areas, other new entrants with new capital have filled the void.
Farrington says construction insurance market is and always has been a fluid market. “It seems like every day there is another carrier that is getting into certain aspects of construction where we have never seen them before,” Farrington said. Regional carriers in particular have started to “dip their toe” in the market for a few of the more difficult classes like road or roofing.
“The market right now, it’s clearly more competitive and we think that will continue into 2016,” Farrington adds.
The construction insurance market is severity prone and one area that’s receiving a noticeable uptick in claims is automobile line of coverage for contractors, Farrington said.
“We have seen modest increases in claims for construction, but more so in the automobile line, which is frankly a headache for our industry,” he said. There are profitability challenges across the board in auto and Farrington says distracted driving, increased costs for medical treatment and the skyrocketing costs of auto repair are driving that trend. “All of this is impacting our industry.”
Another issue, according to Lockton’s Page, is fire risk for wood frame construction projects. “There have been some huge fire losses on construction projects in the past two years so that’s a concern,” Page said.
Construction defect issues continue to cause a bit of concern in strong litigious states, McCall added. “California is strong, Colorado is strong, but then you have areas like Texas and Atlanta where you don’t have any issues with construction defect. Then you go back to the East Coast where you have some incredible contractual issues. They all kind of waffle depending on the geographic area you are in.”
“There’s a very uneven treatment to what is and isn’t covered around construction defect as an occurrence and multi-state contractors can face a very different coverage result based on case law in a given state,” Marino said. “Carriers are willing to modify the insuring agreement at times to provide affirmative coverage but it’s certainly an area of concern and continues to be a concern.”
When it comes to additional insured issues, Marino sees the idea of horizontal exhaustion as a possible concern, which is when carriers seek to pursue claims across all possible general liability policies rather than “up a tower” into the umbrella policies of lower tiered contractors. “This might be inconsistent with what the contracting parties expected and so that creates unpleasant surprises,” Marino said.
Heekin said that typical construction claims, including workers’ compensation, general liability and construction defect, will always be a part of the game. But what he believes could be a game-changer for construction is the size of future claims.
“Projects are getting bigger,” he said. “The tools and methodology used in projects – whether it’s tunnel boring machines, graters or even modular building – are just more expensive,” he said.
That means that construction claims are going to become larger and more complex going forward. “Comp and frequency coverages are going to have a degree of volatility but nothing too outside historical modeling,” Heekin said. “But it’s going to be the bigger ones that we would suggest are going to be the new frontier.”
How those claims will affect the market remains to be seen. “It will be down the road sometime before we can actually understand how they all play out,” Heekin adds.
Farrington adds that CNA is seeing a rise in workers’ comp actions but many of those claims involve new and not as skilled workers.
“If you were to talk to any of our construction association partners, mechanical, electrical, roofing, in their own industry sectors, their major concern is the availability of a skilled workforce,” Farrington said. “So you have younger people, not as experienced on the job site, which gives rise to potential claims.”
In CNA’s own book, Farrington said there’s been an increase in auto claims with the young and/or less skilled workforce.
“We’ve also seen rises in workers’ compensation claims. We have statistics in our own book of business where it breaks down by age group where we see more claims frequency and a lot of it is with the younger less skilled workers.”
Farrington asked: Could construction defect losses also be attributed to younger/less skilled workers? Perhaps, he said. “Maybe because they are not as skilled as they could be and maybe there are issues with faulty workmanship in construction,” he said. “Dare I say that if we had a more skilled workforce out there, maybe we could potentially see a decrease or mitigation in some of the losses” that are occurring.
Contractors are increasingly using camera-mounted unmanned aerial vehicles (UAV), or drones, to monitor their construction activities. While these devices provide a good way to obtain real-time data on job progress and identify potential hazards or quality issues, they could lead to potential risk issues.
CNA’s Farrington says his carrier hasn’t made any changes with respects to drones specifically but they are paying close attention to the exposure.
We are still examining the issue very carefully,” he said. “But in terms of underwriting I haven’t seen anything related to that from where I sit.”
Heekin says the use of drones continues to evolve in the construction sector. “It’s very much a dynamic and fluid situation.” But he sees little cause for concern from an insurance perspective other than when drones are used in densely populated areas.
But a lot of times drones are used in sparsely population areas, such as on a solar energy field construction site out in a desert. “The use of drones allows for a degree of governance that wasn’t quite there before so in some ways that’s helpful in de-risking the project versus increasing the risk,” Heekin said.
Marino says the real problem with drone use in construction is the uncertainty around federal law.
“The FAA was to promulgate rules (for drones) this fall but those rules have yet to be promulgated and operating without FAA approval could create a number of problems for clients,” Marino said. One problem is potential fines. But also operating without FAA approval potentially exasperates civil liabilities should there be an accident, he said.
Despite the unknowns around drone usage, insurers are willing to insure drone use on job sites, he said. “The right form and policies are still somewhat immature,” Marino cautioned. “But if we are going to general liability insurance for the liability of a drone certainly amending the aircraft exclusion would be prudent.”
One emerging risk concern for all businesses today, including construction firms, is cyber liability.
Heekin says Aon’s continues to advise clients on the importance of understanding cyber as it relates to building. One example of a possible cyber exposure could be the confidentiality of building plans. “If you have building plans, particularly at the federal level, the integrity of maintaining the confidentiality of those drawings and the contractor’s acceptance of those drawings is a new risk.”
Marino also agrees cyber is a growing emerging risk for construction clients.
“We are seeing an uptick in claim activity around the social engineering and other types of fraud,” Marino said. Crime and cyber together are experiencing an uptick in claims activity.
“But for construction specifically not only do contractors have the exposure of employee data being exposed but perhaps the loss of confidential technology of customers or data that is shared through BIM (building information modeling) or other design type arrangements,” Marino said.
Despite the growing risk, cyber liability purchasing is still slow in construction, the experts say.
“There’s a learning curve for both the contractors and the market to find the right product at the right price,” Marino said.
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