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Natural Disasters’ Impact on the Construction Insurance Industry

Construction

By Michael R. Pesch, Construction Executive

2017 was the most expensive year on record for natural disasters in the United States—with hurricanes, wildfires and other events resulting in an unprecedented $306 billion in total damage, according to the National Oceanic and Atmospheric Administration. The Washington Post reports that insurers will pay a record $135 billion as a result of natural disasters that occurred last year.

At first glance, these staggering dollar amounts make it seem that these catastrophic events could lead to the demise of the insurance industry. Yet, while natural disasters certainly had a devastating impact in a variety of ways, the insurance industry had the overall financial capacity and aptitude to stay engaged and help people put their lives back together in their aftermath.

This was especially true of the construction insurance industry. Prior to the wave of natural disasters last year, that sector was performing quite profitably. In general, the worldwide insurance market had seen increases in capital and capacity during the last several years, in part because of the lack of natural disasters leading up to 2017.

As a result, while insurers writing U.S. construction business will have marginal results for 2017, the industry will be able to withstand these events. Overall, the construction industry responded extremely well to these catastrophic disasters, as companies quickly mobilized to begin the rebuilding process. Those involved in construction should receive the most credit for responding to these terrible events with resolve and efficiency.

Although the hurricanes and wildfires primarily affected Texas, Florida and California, there will be a ripple effect when it comes to insurance for stakeholders across the construction industry. While a huge spike in insurance pricing is not expected, underwriters will reexamine areas that are susceptible to catastrophic risks to determine their maximum probable loss based on new data from the 2017 natural disasters.

As a result, insurers will be more selective about what they underwrite, and premium costs could increase somewhat as individual insurers will want to take a smaller percentage of risk in areas that are prone to hurricanes and wildfires. Yet, there will not be a dramatic change in the ability for construction stakeholders to find or buy insurance at a reasonable commercial rate.

Another impact specific to the construction industry is that insurers will examine which buildings and facilities survived these natural disasters, specifically in areas affected by hurricanes. Building codes will likely change, and the construction industry will see new requirements regarding projects in catastrophic-prone areas.

Ultimately, this will be a positive development. The Florida Keys are a great example. Structures built after the hurricanes in the mid-1990s have withstood later storms, in part because those hurricanes led to more stringent requirements for quality and building codes.

NEGATIVE EFFECTS

Unsurprisingly, there are negative impacts from the array of natural disasters in 2017. For the construction industry, the disasters compound the sector’s biggest issue: manpower. The construction industry faces a significant shortage of workers at every level—from field labor to project management and engineers. The significant amount of rebuilding that needs to be done following a tumultuous hurricane and wildfire season only exacerbates the lack of labor.

From an insurance standpoint, this will have a negative impact on subcontractor default insurance, which is what general contractors use to insure themselves when a subcontractor fails to perform an adequate job. Subcontractors have continually taken on more work than they have the manpower to complete, leading to significant financial strain and under-performance.

Although the construction industry and its insurance partners withstood a hard 2017, the entire sector should rebound nicely in 2018. It should be a stable year with no major adjustments in rate costs of availability.

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