Understanding Construction Insurance: Actuarial vs. Underwriting Factors

Determining the price of construction insurance is complex, with much of the work happening behind the scenes. Most construction companies interact primarily with an insurance broker or agent, but actuaries and underwriters work to develop models and adjustments that establish the price that an insured entity pays for the policy.

Understanding how actuarial models work, and the interlocking role of underwriters can help demystify construction insurance pricing.

Actuary’s Role in Construction Insurance

Actuaries play a pivotal role in the construction insurance pricing process. They gather data from various sources, including more comprehensive industry resources and the insurance company's internal data, to formulate construction pricing models for different types of work, locations, companies and projects. This detailed data includes risk assessments for various scenarios — such as concrete vs. drywalling work, a project in Idaho vs. California or residential vs. highway construction. The actuary uses a broad data set to assess exposure to potential hazards.

Actuarial Models

Actuaries typically analyze risk to establish a rating plan for an insurer’s whole set of clients. The base rates in the actuary’s model must make financial sense for the insurer so that the totality of policies they write will allow them to profit. With a view of the broader data, actuaries crunch the numbers to price insurance policies, so the insurance company is factoring in the risk when pricing insurance to construction companies.

Calculating the exposure units, or units of measurement to underlie the pricing of policies, for each characteristic in construction projects requires actuaries to develop a model that can cover a wide variety of projects. With a large enough data set, actuaries can formulate a credible model that accounts for the numerous variables needed to set insurance rates.

Actuarial Pricing Factors

With the different types of construction insurance policies, varied details impact pricing. For instance, a worker’s comp policy will have different metrics to consider than a general liability policy. The size of the project is the most significant determinant in insurance pricing, as the number of exposure units goes up with the dollar amount and scope of a project. Actuarial models include these foundational categories:

• Project Characteristics

  Size, type, location, frame factor, fire protection class

• Builder Characteristics

  Number of years in business, experience, operational practices

• Coverage Details

  Limits, deductibles, exclusions

• Loss History and Claims Data

  Losses in the types and locations of work across the larger dataset

Project types have varied risk exposure, which is derived from data. A hospital project is more complex and hazardous than a school building. The height of a structure impacts the risk. There are class codes for the various types and specifics related to building types. The project's location is another variable that is part of the model.

Specific builder characteristics can reduce the price of a policy within the actuarial rating structure. For instance, a contractor with no losses in the previous three years may get a credit that reduces the overall policy cost. Conversely, a builder with more than two yearly claims may merit a surcharge. The actuarial model gives underwriters guidance on the percentage of credit or debit to apply to specific company characteristics.

Underwriter’s Role in Construction Insurance Pricing

Actuaries analyze exposures by examining company and industry data overall, while underwriters assess the company seeking coverage and the project more closely. Underwriters are usually the ones to price a policy, using expert judgment to apply credits and debits to the pricing model provided by an actuary.

Underwriter Adjustments to Insurance Pricing

Starting from the actuarial model, underwriters use information about a specific company or project to determine whether to credit for lower risk or, in some cases, higher risk. The underwriter plugs in the actual project information, such as size, type, claim limits, and information about the construction company. Each type of insurance may have varied categories for the underwriter to enter into the model.

For instance, a company seeking builder’s risk insurance with a robust safety plan in place and regularly implementing all facets of the plan might be a somewhat lower risk than average. In that case, the underwriter may apply a credit to lower the policy cost. If the builder uses digital tools that validates the implementation of the safety measures, the underwriter can use that data to offer credit for sound risk management more confidently.

Underwriters have discretion in applying credits or possible surcharges when formulating policy pricing. Some of the features underwriters look at include:

• Company Financial Records
• Loss History
• Project Experience
• Quality Assurance Program
• Location
• Safety Plan
• Site Protection
• Technology Adoption

Trends in Construction Insurance Pricing

The increasing use of construction technology makes more data available to actuaries to assess broad data sets and to underwriters to validate operational performance metrics when setting pricing. Builders who provide detailed data from construction management technology confirm operational performance and can benefit from individualized pricing that more accurately represents the risk.

Pricing insurance historically relied upon data, data that was provided by the builder or their representative, yet verifying that data was difficult. With more technological data, actuaries can offer a more nuanced set of metrics to assess risk. Underwriters can better apply this to a pricing model that is more sophisticated and customized so that policies can be tailored to each insured and their specific exposures.

As more hard data exists in construction procedures, construction software management platforms can help insurers manage the complexity of insurance pricing processing. However, actuaries and underwriters create and apply models with expertise, and their interlocking roles allow insurance companies to remain profitable and continue to offer policies that builders need to operate.

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