The excess and surplus lines (E&S) construction insurance market has experienced quite a prolonged soft market cycle in the past decade. Pricing has been relatively depressed, and buyers have enjoyed a number of years with favorable policy terms and conditions. However, in trend with wider property and casualty market firming, the tide in E&S construction is slowly turning. That’s thanks to some significant wildfire losses in the past few years and ongoing challenges with New York construction.
Ultimately, insurance carriers can only write down reserves for so long until they have to replenish their savings accounts. That’s where the E&S construction market is at right now. But in the casualty space, construction remains relatively healthy. Carriers are pressing for a little bit of rate to replenish their reserves, but these increases are nowhere near as dramatic as they are in some other lines.
“In the last six months, the market has shifted more dramatically in terms of conditions tightening up and some carriers ultimately withdrawing from the marketplace,” said Evan Aldrich, vice president – brokerage, CRC Group. “In general, it’s still a buyer’s market – the pricing on primary and short-limit excess is still very soft – but it’s trending upward, and we’re going to start seeing some of the very favourable terms and conditions tighten up.”
Over the last 10-years, wholesale brokers like CRC have been able to get large chunks of carrier capacity at relatively low cost. For instance, they could get $25 million blocks of limits, with general aggregate exposure or no additional premium, Aldrich explained. But that’s where the market is seeing some immediate changes.
“Insurance carriers are going to charge more for the cost of their capacity,” he told Insurance Business. “In construction insurance, you’re not only covering the risk for the time of actual construction, but also for the statute of repose up to 10+ years, depending on the state. If a carrier is providing a $25 million limit for minimum premium, they’re sometimes providing that promise for the next 12 years, and they’re ultimately going to charge a little bit more for that.
“This is a long-tail business. The most favourable states, like Tennessee, have statute of repose for three years after completion, but a lot of states are 10+ years. If you have a four-year construction project and a 10-year extended completed operations period, you’re on that risk for 14 years. That’s a long time for an insurance company to tie up their capacity.”
In this environment, brokers who want big chunks of limit are going to have to pay more for it. Furthermore, if the marketplace only supports smaller chunks of capacity, brokers are going to have to use more markets to get deals done.
“Instead of getting a $25 million limit, a broker might have to get a $10 million limit from two carrier partners and a $5 million grant from a third,” Aldrich commented. “Brokers will have to use a lot more markets and prices are going to be more expensive. That’s why it’s important to partner with a broker who has those strong relationships.”
