Managing Construction’s True Risk Exposure
When it comes to the construction industry, the path to success is never easy.
After a long, deep recession of historic proportions, the sector is finally on the mend. But as opportunities to win new projects grow, experience shows that more contractors go out of business during a recovery than during a recession.
Skilled labor shortages, legal rulings in various states that push construction defects onto general liability policies, and New York state’s labor laws that assign full liability to project owners and contractors for falls from elevations that injure workers are just some of the established issues that are making it ever harder for firms to succeed.
And now, there are new emerging risks, such as the potential for more expensive capital, should the Federal Reserve increase its rates. This would tighten already stressed margins, perhaps making it harder for contractors and project owners to invest in safety and quality assurance, and raising the cost of treating injured workers.
Liberty Mutual’s Doug Cauti reviews the top three risks facing contractors and project owners.
“Our customers are very clear about the challenges they are facing in the market,” said Doug Cauti, the Boston-based chief underwriting officer for Liberty Mutual’s construction practice.
“Now more than ever, construction risk buyers – and the brokers who serve them – are leveraging our team’s deep expertise to find solutions for complicated risks. This goes way beyond what many consider the traditional role of an insurance carrier.”
Other leading risks facing contractors and project owners.
Given the current risk environment, firms that simply seek out the cheapest coverage could leave themselves exposed to these emerging risks. And that could result in them becoming just another failed statistic.
So what is the best way to approach your risk management program?
Understanding the Emerging Picture
Construction firms have been dealing with multiple challenges over the last several years. Now, several new emerging risks could further complicate the business.
After an extended period of historically low interest rates, the Federal Reserve is indicating that rates could rise in late 2015 or sometime in 2016. That would surely impact construction firms’ cost of capital.
“At the end of the day, an increased cost of capital is going to impact many construction firm’s margins, which are already thin,” Cauti said.
“The trickle-down effect is that less money may be available for other operational activities, including safety and quality programs. Firms may need to underbid and/or place low bids just to get jobs and keep the cash flow going,” Cauti said.
“Now more than ever, construction risk buyers – and the brokers who serve them – are leveraging our team’s deep expertise to find solutions for complicated risks.”
— Doug Cauti, Chief Underwriting Officer, Liberty Mutual National Insurance Specialty Construction
“Experience shows us that shortcuts in safety and quality often lead to more construction defect claims, general liability claims and workers’ compensation claims,” Cauti said.
Currently, the frequency of worker injuries is down on a national basis but the severity of injuries is on the rise. If those frequencies start creeping up due to less robust safety programs, the costs could grow fast.
And if this possible trend is not cause enough for concern, the growing costs associated with medical care should have the attention of all risk managers.
“Five years ago medical costs represented 56 percent of a claim,” said Jack Probolus, a Boston-based manager of construction risk financing programs for Liberty Mutual.
“By 2020, that medical cost will likely grow to 76 percent of an injured worker’s claim, according to industry experts,” Probolus said.
Rising interest rates and rising medical costs could form a perfect storm.
Focusing on the Total Cost of Risk
For risk managers, the approach they utilize to mitigate the myriad of existing and emerging risks is more important than ever. The ideal insurance partner will be one that can integrate claims management, quality assurance and loss control solutions to better manage the total cost of construction risk, and do it for the long term.
Liberty Mutual’s Doug Cauti reviews the partnership between buyers, brokers and insureds that helps better manage the total cost of insurance.
In the case of rising medical costs, that means using claims management tools and workflows that help eliminate the runaway expense of things such as duplicate billings, inappropriate prescriptions for powerful painkillers, and over-utilization of costly medical procedures.
“We’re committed to making sure that the client isn’t burdened in unnecessary costs, while working to ensure that injured employees return to productive lives in the best possible health,” Probolus said.
The right partner will also have the construction industry expertise and the willingness to work with a project owner or contractor from the very beginning of a project. That enables them to analyze risk on the front end and devise the best risk management program for the project or contractor, thereby protecting the policyholder’s vulnerable margins.
“We want to be there from the very beginning,” Liberty Mutual’s Cauti said.
“This isn’t merely a transaction with us,” he added. “It’s a partnership that extends for years, from binding coverage, through the life of the project and deeper as claims come in and are resolved over time,” he said.
In other words, it’s a relationship focused on value.
Today’s construction insurance market – with an abundance of capacity – can lead to new carriers entering the market and/or insurers seeking to gain market share by underpricing policies.
“We see it all the time,” Liberty Mutual’s Cauti said.
Where does this leave insureds? Frustrated at pricing instability, or by the need to find a new carrier. And wiser, having learned the wisdom of focusing on value, that is the ability to better control the total cost of risk.
“Premium is always important,” notes Liberty Mutual’s Cauti. “But smart buyers also understand the importance of value, the ability of an insurer to partner with a buyer and their broker to develop a custom blend of coverages and services that better protect a project’s or contractor’s bottom line and reputation. This is the approach our dedicated construction practice takes.
Why Liberty Mutual?
For more information on how Liberty Mutual Insurance can help assess your construction risk exposure, contact your broker or Doug Cauti at [email protected].
This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with Liberty Mutual Insurance. The editorial staff of Risk & Insurance had no role in its preparation.