Contractors are taking on more risk – and they're getting rewarded for it

Contractors are taking on more risk – and they’re getting rewarded for it | Insurance Business America

Construction & Engineering

Contractors are taking on more risk – and they’re getting rewarded for it

Could this be the future of construction insurance?

Construction & Engineering

By
Lauren Johnson

The construction insurance industry is seeing a subtle, yet steady, shift with contractors assuming more risk than ever before. So says Michael Cusack, executive vice president of Alliant Specialty.

“On the surety side, the evolution of the product has been moving slowly for the last 100 years,” Cusack said. “But over time, it will become more of a liquid instrument. Not anytime soon, but eventually, surety will act more like a letter of credit in certain situations.”

Overall global infrastructure construction output will grow at an annual average rate of 5.2% in 2024 to 2027, following the expansion of 10.7% in 2023, according to WTW’s Global Construction Rate Trend Report: Q1 2024.

Cusack emphasized that while this transformation is far from imminent, the evolution will likely benefit larger players in the construction industry.

“That capability will be preserved for only the bigger balance sheet players because there will be more volatility around a liquid form of surety security,” he said.

This shift aligns with how contractors are assuming more risk as they take on higher deductibles and manage their risk portfolios more effectively than insurance companies. The focus on contractors managing risk isn’t just a trend for Cusack; it’s a fundamental shift that he believes will shape the future of the industry. The contractors who can develop sophisticated internal risk management systems will thrive.

“Contractors are taking on more deductible risk and manage that risk effectively using in-house protocols, and the ones that can do that will be the most successful,” Cusack said. “Construction jobs are getting much bigger, and the risks are becoming more complicated. If contractors can develop the systems and the personnel to manage risk, they can do it more efficiently and therefore be rewarded for that.”

So why the shift? Contractors, especially well-managed ones, are being rewarded for taking on more risk, according to Cusack. The construction industry’s margins are tight, and competition is fierce.

This dynamic is setting the stage for contractors who have the resources and discipline to navigate these risks themselves, with insurance taking on a more supplementary role.

“The better-managed firms that have the discipline, the data, and the protocols around managing risk are being rewarded for assuming that risk and managing it more efficiently,” Cusack said. “The margins in the industry for contractors, the stipulated fees, aren’t changing. It’s a commoditized industry. The only way for contractors to generate more margin opportunity is around assuming more risk and managing that risk more effectively.”

What does this mean for the insurance companies? Cusack believes it’s all about competition and the redistribution of risk. Insurance companies are still essential, especially as inflation drives up the value of insurable risks, but contractors who can manage their own risks are beginning to carry more weight.

“I think the risk is going to reside where it belongs,” he said. “The contractors who can properly manage it will be rewarded, and the ones who can’t, will be paying a premium for risk transfer.”

The construction industry isn’t just about hammering nails; it’s about data, discipline, and risk management. The insurance exposure isn’t shrinking, but the landscape is changing.

“The projects are getting so large, and the losses are getting so big. Social inflation, within the court system, is still out of control in many jurisdictions,” Cusack said, adding that this only makes effective risk management more critical.

Cusack’s insights illustrate a broader trend in the construction and insurance industries: a shift toward greater self-reliance for contractors and a transformation of how risk is managed. Insurance companies aren’t being phased out, but their role is evolving as contractors, particularly those with the right tools and expertise, take on more responsibility for their own risk.

This evolution could signal a major reshaping of the industry. Contractors with larger balance sheets, access to vast amounts of data, and disciplined risk management strategies will be in the driver’s seat, while those unable to adapt may find themselves on the back foot, relying on insurance companies to pick up the slack.

As projects grow in scale and complexity, and with external pressures such as inflation and legal challenges continuing to rise, the industry’s landscape is becoming more nuanced. Contractors are stepping up, taking on more risk—and insurance companies are watching closely.