Design and construction’s ‘gyroscope’ post-pandemic reality

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A leading voice in design and construction professional liability insurance says there is still opportunity to be had for those who are preparing for today’s new realities

HIGHER CONSTRUCTION COSTS, labor shortages, and consistently higher verdicts by juries are just some of the issues impacting today’s design and construction insurance market. Yet there is an opportunity to thrive if insurance firms are willing to ask the hard questions of themselves and their clients and ensure they are prepared. “The central message is really one of opportunity,” says Kevin Collins, design and construction leader at Victor Insurance Managers LLC. He cautions that “there are many open pits, there are challenges to success, but the central message is that, with a little foresight and strategy and planning, firms have the opportunity to be as successful as they possibly can be, both in the near term and over the next several years, based on current market conditions.”

Victor Insurance Managers LLC is a global leader in underwriting management, using advanced technology and an innovative approach to managing risk, distribution, and capital access. It operates in the United States, Canada, the United Kingdom, Australia, Italy, Germany and the Netherlands.

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“There are challenges to success, but the central message is that, with a little foresight and strategy and planning, firms have the opportunity to be as successful as they can be in this changing environment”

Kevin Collins, Victor Insurance Managers LLC

What image pops into Collins’ mind when it comes to current market conditions? “It’s a gyroscope,” he says. “The market presents a level of uncertainty and change that’s not been seen in many decades. Getting more control of the factors impacting those changes will take some time to play out and resolve.” There are the lingering impacts of the pandemic, “which didn’t necessarily stop the design industry from practicing or designing,” Collins says. “But what it did was lead to other elements that were tough to navigate,” like labor shortages and supply chain problems. But that also led to opportunities. During the pandemic the industry saw increases in revenue from civil engineers as governments decided to accelerate their shovel-ready projects at a time when fewer people were travelling. “In hindsight, what we saw was an acceleration of opportunity through 2022 that presented a lot of growth [through the] acceleration of shovel-ready projects,” Collins says. Because of previous “pull-back” at the start of the pandemic, some projects had been on hold, but now, regular demand is meeting pent-up demand, where “a lot of projects come to bear. It’s an abundant element of riches. Everybody has some opportunities to grow.”

But putting a damper on the party are things like inflation, which raises the cost of materials and labor, as well as increasing the shortage of labor itself (which further raises the price). “A couple of things are going on with those increased costs,” says Collins. “The question from a carrier point of view is, are you capturing enough premium for the exposure that’s been assumed? What brokers and clients will start to see is the cost rising for higher limits. Since an adequate limit is required to work on that project, firms will need to budget for higher costs to maintain that limit.”

This means brokers should make sure their clients “provide additional information” on applications, and strengthen areas of risk management and risk control, since “a traditional application in the marketplace doesn’t always ask all of the necessary questions.” Victor is noticing that brokers “are helping to position their clients more effectively by going beyond what is asked in a traditional application and providing details of the risk mitigation practices they have implemented. This helps to drive understanding and appreciation of how those efforts mitigate the risk to the underwriter and the market insuring the insured. The marketplace is looking for that level of differentiation.” For firms that are not changing – that is, “where we are starting to see cracks in the foundation” – they, and other firms, may need to review project selection or re-evaluate some client relationships, Collins says.

“I think the pressure is on getting new staff, along with the opportunities for firms to grow profitably,” he says. “That’s going to continue to be a pressure point.” Another opportunity Collins sees is the sharing of information made possible by technology.

“Carriers are faced with greater uncertainty as they manage through increased severity in losses; brokers that can help their clients navigate the additional information needed to differentiate their clients effectively in this market will thrive”

Kevin Collins, Victor Insurance Managers LLC

There is also the challenge of lawsuits. “We’re continuing to see higher settlements and verdicts,” says Collins. Climate change is a very live issue in the insurance world, but it’s having unintended consequences too. As more bike lanes are built to get people out of their cars, “we have a greater likelihood of crashes.” That can leave state or municipal governments “seeing higher claims” for collisions. “When I go back 30 years, one out of 10 claims involved bodily injury,” Collins says. “Today, we continue to see that one out of 10 claims involve bodily injury. The change we are seeing is that the percentage of claims payments involving bodily injury has increased from 6 to 8% to close to 20% over the past five years.”

He calls this “social inflation,” especially if there is a “sympathetic plaintiff” in the case. “Some dynamics are different in this concept of social inflation. That’s the reason people buy insurance, right?” The professional design and construction communities will not be able to solve it, “and that just becomes one of the elements that’s driving the severity element and the importance of adequate tools for exposure capture.” In the near future, there “will be an impetus for the client to try to manage or take more activity on their risk management practice to manage for profit over time.”

Post-pandemic design and construction gyroscope

Impact of inflation

Jury rewards

Published 27 Mar 2023

7.5 million

“If design firms fail to provide underwriters with evidence of differentiation through strengthening their risk management and loss control measures, they may have problems on claims and get caught up in these issues,” he says. “These are the areas we need to focus on.” Inflation comes and goes, and this latest rise will one day subside. But the issue of a labor shortage will take longer to fix – and has already been a long time coming. Collins says he has attended countless meetings with design firms where “the ability to attract and keep new talent has been an issue” for years, even pre-pandemic. Even a deluge of new talent will mean there is a lack of experience in their respective fields.

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Number of people employed in the construction industry as of January 2022

4.8%

Percentage of US workforce employed in construction

4.3%

Percentage of US GDP made up by construction

1,337,800

New housing units completed in 2021 – a 4% increase from 2020

Source: Zippia

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Impact of inflation

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Kevin Collins, Victor Insurance Managers LLC

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