This article was produced in partnership with Agile Underwriting Solutions
Jen Frost, of Insurance Business, connected with Stacy Goddard, Agile Underwriting Solutions’ senior commercial underwriter, to discuss challenges facing construction firms – and how insurance is responding.
Construction firms across Canada are facing rising costs – and this poses potential underinsurance problems as inflation has hit heights of over 8% year over year.
Construction firms have faced challenges since 2020 and the onset of the pandemic, with the temporary closure of sawmills leading to low stock.
The onset of rising construction costs can mainly be attributed to “low supply and high demand”.
All types of construction businesses have been affected by price hikes, according to Stacy Goddard (pictured), senior commercial underwriter at Agile Underwriting Solutions. However, some regions have been worse hit than others.
Costs for residential construction projects in Western Canada have seen increases as high as 6.9%, Goddard said. Eastern Canada, meanwhile, saw increases of 2.1% to 3% into the first quarter of 2022.
Lumber prices reached record highs in 2021, according to Goddard, but have started to decline into the second quarter of this year.
Unfortunately for construction businesses, not all materials have followed suit. Steel, drywall insulation and roofing and siding products have all continued to rise in price.
While it is anticipated that inflation will level out somewhat over the next couple of years, potentially at 5% to 6%, Russia’s Ukraine conflict continues to pile on the pressure for businesses on a global scale.
Russia is an exporter of oil and natural gas, metals, and raw materials – and costs have risen as a result of supply chain disruption from its Ukraine invasion.
“Delays in the supply chain, which were first caused by the global pandemic, that were beginning to shift are now being adversely affected by the Russia-Ukraine conflict due to sanctions imposed on Russia,” Goddard said.
“Rising fuel costs affect every aspect of the construction industry, from materials, supplies, delivery, shipping, and manufacturing.”
Skilled worker shortages are also causing headaches for construction firms.
“The pandemic sparked many skilled workers to retire early, and younger workers are taking opportunities outside of the construction industry,” said Goddard. “This can force a business to have to pay higher wages to secure skilled laborers, which in turn could further increase costs, as up to 50% of building costs are labor.”
Interest rates have been on the rise since March of this year, and forecasts have suggested they could hit as high as 5% by the end of 2022. In response to the tightening economic situation, construction firms may be forced to increase prices to offset financing on their end in “an effort to maintain profitability”, according to Goddard.
Housing market trends also have a part to play.
“With the increase in mortgage costs for consumers there will also be a lower demand in the housing market,” Goddard said.
Goddard urged agents to “carefully review” risk characteristics, values, and geographical locations with clients to ensure coverage and limits are adequate. Otherwise, firms may end up facing an underinsurance problem.
It is also vital that brokers keep clients up to date on why and how the market is moving, according to Goddard.
“Agents should be continually educating policyholders on how increases in building materials and supplies affect reconstruction costs and insurance to value,” Goddard said. “As construction inflation increases, coverage limits need to be carefully reviewed and adjusted accordingly.”
Stacy Goddard began her insurance career in personal lines in 2009. Since then, Stacy has gone on to gain her CIP designation, and is now senior commercial underwriter at Agile.
