In many ways, 2023 has been a year of catchup in the insurance industry with Property insurance rates serving as the poster child for that thesis. In 2022, we saw a quiet storm season until Hurricane Ian struck south Florida in September 2022, causing about $113 billion in damage in the US.1
That hurricane and other catastrophic losses such as the Turkey/Syria earthquake in the first quarter of 2023 caused Property reinsurance rates to surge. These price surges carried through to the retail insurance markets, particularly in high-risk areas.
As we reach the end of the 2023 hurricane season, however, no major storm has made landfall in the continental US (Acapulco is a different matter). While reinsurers are still trying to return to profitability by raising rates to make up for past losses, there's potential for the market to stabilize after additional rate increases in the next renewal period.
As always, insureds in the Architectural, Engineering, and Contracting (AEC) community can take steps to reduce their overall cost increases by proactively working with their carriers and taking appropriate steps to reduce their risks. This report focuses on the following lines:
- Property and Builder's Risk insurance
- General and Excess Liability insurance
- Professional Liability insurance
- Workers' Compensation insurance
Additionally, we're adding a section on a trend we're seeing — the expanding role of risk managers.
Property and Builder's Risk insurance
At the retail level, Commercial Property insurance rate increases in the third quarter hovered around 10%.2 The cost of reinsurance largely drove these rates increases, where primary or retail insurers purchase insurance to cover extraordinary losses.
While 2023 has seen some catastrophic losses, those losses are much less than in 2022. For example, the Maui wildfires are estimated to have caused $4 billion to $6 billion in property damage.5 This damage is tremendous, but much less than the $113 billion from Hurricane Ian.
These reduced losses are now being reflected in slower price increases for catastrophic insurance. For example, at a September 2023 conference, the four largest European reinsurers gave presentations stating that rates would likely rise again for year-end renewals, but retail rates are expected to rise in the range of 8% to 17%, compared to the 40% to 50% increase in 2022.4,5
Much of the increase is expected because new capacity has yet to enter the market.4 However, the combination of rate increases and fewer catastrophic losses has allowed reinsurers to start making profits after several years of losses.6 These profits should draw new capacity into the market, which should lead to stabilization after this year, assuming that the number and magnitude of catastrophic events also normalizes.
Builder's Risk insurance
Builder's Risk insurance is a subset of the Property insurance market, but it also covers risks unique to buildings under construction. The three most frequent claims involve theft, fire and water damage.7 Due to large losses, the Builder's Risk insurance market is still tight, and carriers are requiring certain efforts to reduce losses before they'll write the policies. These efforts include things like requiring contractors to install security cameras and detection devices.
To reduce rate increases, it's important to establish plans to address these risks at the start of the project. For example, theft can be reduced by adding secured areas to the jobsite for materials to be dropped off and stored. Smart water systems can be used to detect leaks early, and fire watches can be added for at least an hour after hot work is finished.
We're also seeing an important trend in how Builder's Risk carriers are addressing technological innovation in the construction industry. The industry is undergoing an intense period of innovation, including the emergence of new structural systems like 3-D printed concrete (3DCP) and mass timber, and new energy systems like solar panels and geothermal wells. Designers and contractors are also using newer tools like artificial intelligence (AI), robotics and drones.
Each innovation comes with a new risk. For example, solar panels are subject to micro-cracking, which can reduce the power output and useful life of the solar panel. Micro-cracking can occur before the panels arrive on site, but it can also be caused by mishandling or improper installation. Such damage should be covered by Builder's Risk insurance, but some exclude this risk.8 Accordingly, it's important to understand the project and the proposed means of construction to ensure that the Builder's Risk policy actually covers the unique elements of your project.
The insurance market is telling us that we must mitigate catastrophic losses, and this impetus provides multiple opportunities for contractors, both in original construction and retrofitting. For example, electrical transmission lines are a significant cause of wildfires in western states, including the 2021 Dixie wildfire in California and the recent fire in Maui. The desire to prevent future fires is leading to increased spending on measures to prevent ignition, including undergrounding and conductor covering. Currently, there's significant debate on the optimal mix between these two measures because conductor covering is cheaper, but less effective than undergrounding. Undergrounding has other benefits, such as reducing future costs for measures such as tree trimming and weather damage.9
In addition to undergrounding utilities, existing structures can be retrofitted to withstand damage from hurricanes, floods and other natural disasters. Other opportunities include infrastructure projects such as floodwalls and enlarged storm water management systems. Such projects may also give rise to interesting public-private partnerships.
Liability insurance cost increases
Liability insurance premiums have been increasing across all categories, with some relief only in the Workers' Compensation insurance arena, where benefits are controlled and less subject to the increasing costs of verdicts and settlements, also known as "social inflation."
On the liability side, Commercial Auto insurance losses have risen from breakeven during the pandemic to about $3.3 billion in 2022, driven by more miles being driven and social inflation.4 Although many companies are trying to reduce losses through telematics (technology to monitor driving behavior) and better training, poor risks can expect to see double-digit increases. Indeed, renewal rates increased by an average of 7.01% in August versus 6.62% in July.10
General Liability insurance rates have also been increasing, although at a lesser rate than Auto insurance rates, with third-quarter rate increased averaging 5.21%.2 Excess rates also increased in the third quarter at a slightly higher rate than General Liability rates, with an average increase of 5.29%.2
Professional Liability insurance
Professional Liability insurance can be divided into coverage for designers and coverage for contractors. In both markets, we're seeing some softening and a lower rate increase. In the third-quarter average Professional Liability insurance rates rose 3.3%.11 This number is in the midrange of the 2% to 5% increases we were seeing.12
On the contractor side, the main increase in claims involves projects delivered as design-build and Construction Manager at Risk (CMAR). Design-build claims are similar to those against an architect or engineer for errors and omissions in the design. The CMAR claims relate more to how the construction manager managed the project, such as errors in scheduling, and tend to be less severe. Although rate increases have been fairly mild overall, the market is still hard on the design-build side, where rates have increased significantly and capacity is limited.12
Workers' Compensation insurance
On the Worker's Compensation insurance front, a recent study showed that medical payment decreased by an average of 3% per claim based on a 17-state survey.13 This decrease is leading to recommended rate decreases in several states, such as Connecticut and Colorado.14, 15
Learn about 2024 changes to Workers' Compensation in our article Upcoming Workers' Compensation Updates.
Expanded risk manager portfolios: A focus on resiliency
Traditional risk managers focused on risk financing: procuring different kinds of insurance to cover foreseeable risks, such as accidental injury. Because more accidents and claims led to higher premiums, risk management increased emphasis on safety and accident prevention. Risk managers are now expanding their portfolios to at institutional resiliency.16 This expansion often begins with a failure analysis exploring different scenarios of what can go wrong and then adjusting processes to reduce the potential for failure. This approach is similar to a safety analysis, but focuses on other business risks.
A recent QBE study demonstrated the need for expanded risk management portfolios. It found that fewer than half of mid-sized companies had risk mitigation plans in place for some of their most concerning, but uninsurable, risks.17 These risks include financial risks, such as operational performance and liquidity concerns, but also for talent recruitment and retention risks, and macro-economic and regulatory risks. In many cases, these non-insurable risks can be addressed with resources from the traditional risk management role — for example, by using a captive insurer to make a loan to the parent to assist with temporary cash flow shortages.16
Another important aspect of resiliency involves cybersecurity. A recent survey showed that 90% of respondents were confident they had implemented best cyber practices, but 50% of the respondents didn't have an incident response plan, and 25% hadn't even undertaken basic cybersecurity protocols, such as firewall/virus protection and data backup.18 These results are shocking when you consider the risk of inadequate cybersecurity.
Overall, the insurance industry in 2023 has been playing catchup, particularly in Property insurance rates. Catastrophic losses and damage from Hurricane Ian in 2022 caused Property reinsurance rates to surge, which impacted retail insurance markets. While reinsurers are still raising rates to recover from past losses, we expect the market to stabilize after further rate increases, especially after a quiet hurricane season in 2023. To limit the impact of the market rate increase, it's vital to focus on your own risk management as it impacts all of your insurance needs, whether in Property, Auto, or General Liability insurance.