Construction sector hit by higher costs, labor woesPosted On: Nov. 2, 2022 12:00 AM CST
The construction sector is facing a one-two punch of rising material costs and shortages combined with an acute shortfall of skilled labor, from tradespeople to professional quality control positions at major contractors.
And when seeking insurance coverage, project owners and contractors face a combination of still firming rates and capacity cutbacks.
The combination of rising insurance prices and the shortages can cause problems with project scheduling and can make securing coverage for construction projects a challenge.
In addition, demand is set to rise further with another half-trillion dollars of federally funded projects about to commence as a result of the federal infrastructure bill (see related story).
Global real estate manager CBRE Inc.’s Construction Cost Index forecasts a 14.1% year-over-year increase in construction costs by year-end 2022 as labor and material costs continue to rise.
According to Danette Beck, head of industry verticals and national construction practice leader for USI Insurance Services Inc. in Valhalla, New York, input costs for construction have risen 40.5% since February 2020, based on data from the Associated Builders and Contractors.
“The labor shortage, and in particular skilled labor, is by far the single largest struggle” construction companies face, followed closely by shortages of materials and equipment due to supply chain issues, she said.
“There’s going to be a bigger demand for construction than supply of talent to do the work,” said Gary Kaplan, Chicago-based president, North America construction, at Axa XL, a unit of Axa SA.
Mr. Kaplan also sees challenges in the firm property/casualty markets, where rates are still rising, albeit at a slower pace than in 2021. “There’s nothing that would push the market into a soft environment,” he said, as inflation and supply chain issues continue to vex the construction sector and wider economy.
“The construction space and property space is tough,” said Kevin Bates, group head of risk and insurance for Australian construction company Lendlease Corp. Material prices from dry wall to glass have been spiking and the labor market is “a shocker at the moment,” said Mr. Bates, who is also a board member of the Risk & Insurance Management Society Inc.
According to the Council of Insurance Agents and Brokers pricing survey, average construction insurance rates rose 4.2% in the second quarter.
Most sources agreed the toughest parts of the property insurance market are catastrophe-exposed properties, including in areas prone to wildfire, particularly in California, although Colorado and as far east as New Jersey have also seen blazes.
“The property market has remained very firm and demand for critical catastrophe capacity continues to outpace supply,” said Kelly Kinzer, Schaumburg, Illinois-based head of construction for U.S. national accounts for Zurich North America.
Policyholders also face challenges in the casualty market for construction risks. Line sizes have been cut back in the sector, and attachment points raised amid insurers’ fears of so-called nuclear verdicts, which refer to jury awards running into the tens of millions or even billions, and cases that may still be unresolved since courts were closed during the pandemic lockdowns, according to sources.
“How much liability tower can you build? That’s still a huge challenge,” Mr. Kaplan said, adding that some policyholders do not always secure as much limit as they think they need or would like.
Helen Fry, vice president, E&S wholesale, brokerage construction at Nationwide Mutual Insurance Co. in Phoenix, said insurers need to be cautious about reducing rates in the face of headline verdicts and the potential uncertainties in the court backlogs.
Umbrella and excess casualty markets also continue to see steep rate increases and capacity constraints, said Russ Stein, Newport Beach, California-based area executive vice president at Risk Placement Services Inc.’s national brokerage, casualty practice. Lead lines have been drastically reduced during the hardening market to $5 million and $10 million, from $25 million previously.
In response to the market hardening, policyholders are “looking at their program and thinking a little bit differently in terms of structure than they have in the past,” Ms. Kinzer said (see related story).
Project delays have become more common amid the labor and materials shortages, which can then lead to scheduling and sequencing challenges. The delays also can lead to the need to extend insurance policies beyond their scheduled expiration, which can be complicated.
An insurer or panel of insurers “may or may not have the appetite they had in the construction world at the time they originally bound the risk,” Axa’s Mr. Kaplan said. “It does get to be difficult.”
Labor shortages and increasing raw material costs “have a huge impact” when extending coverages, RPS’s Mr. Stein said. A lot of negotiation goes into determining how long coverage can be extended while contending with scheduling and other difficulties.
Multiple sources also pointed to Hurricane Ian’s effect on the construction insurance market, which will lead to claims and capital leaving insurers’ coffers. Rebuilding efforts will put additional strains on already depleted labor and materials availability.
“There is still a question on Ian. Certainly, that bleeds over into other areas because the reinsurance market supports the entire market, not just one segment,” Ms. Beck noted