— 10 min read
Construction Insurance Pricing: What Determines the Cost of Insurance?
Last Updated Sep 5, 2024
![Photo of construction professional at a desk looking at a tablet and surrounded by documents](https://www.procore.com/library/wp-content/uploads/2024/07/insurance-pricing-for-construction-768x384.jpg)
Construction is a risky and litigious business, and insurance can help mitigate the risks for builders and owners. Construction insurance is a valuable and frequently required tool, so understanding how insurance is priced can help companies position their policies to maximize the benefits while keeping the costs under control.
This article will cover the factors insurers use to price policies — and how technology is beginning to change how insurers assess and verify risk to price construction insurance.
Table of contents
Major Factors for Construction Insurance Costs
During the underwriting process, insurers consider two basic categories when pricing a policy:
- Exposure
- Loss history
Insurance companies start their calculations from base rates, either industry-compiled statistics or their own base rates, and use the exposure and loss history factors to raise or lower the price offered to construction companies for an insurance policy.
Owners and financial institutions often require certain insurance coverages for construction projects. The cost of insurance needs is part of estimating the cost of a project, and understanding how factors affect pricing can help companies choose coverage appropriate to their business goals.
Exposure Factors
The risk exposure varies by the type of insurance contractors are seeking to purchase and the type of project they are taking on. The exposures for general liability insurance will differ from those for workers’ comp, just as builder’s risk factors will vary from subcontractor default insurance. Some of the elements that come into play include:
Project size | Insurance pricing is impacted by whether a project includes 30 vs. 250 townhouses or is for a 20-story vs. 3-story office building. The scale also affects how many workers and the quantities of materials on site, with the risk and coverage needs increasing with size. |
Scope of work | The size of the project impacts the scope of work, but the insurance policy may cover only one part of it. For example, an insurance policy covering a painting contractor would be very different from that covering the structural steelwork. Certain types of work are inherently riskier than others. Elevator installation, highway and bridge projects, working many stories above ground, and other details in the scope of work may increase a contractor’s risk profile. |
Geographic region | Building in specific regions is more difficult due to a variety of environmental, geographic and geological factors. For example, Colorado has rocky soil, which makes construction more difficult. Other areas are known for sinkholes, and building on cliffsides in California would also increase difficulty and risk. Insurers sometimes ask for a geotechnical report to help determine the risk profile for a project. |
Weather and natural disasters | Certain locales have higher risks of particular weather events. Hurricanes and floods are frequent along the Gulf Coast, the Midwest often experiences heavy storms and tornados, and wildfires are prevalent in the western U.S. Extreme cold, such as in the northern parts of the U.S., or heat in the South, can also influence construction risk. |
Local laws and regulations | Different jurisdictions have more or fewer regulations that can increase or decrease risk. |
Overall Market Conditions | Insurance carriers are influenced by market factors, such as the large number of claims in a certain period, making offering policies more risky and expensive to the insured. Insurers are exposed to risk for their whole portfolio of policies, and depending on how risky the market is, rates can fall or rise. |
Soft vs. Hard Insurance Markets
In a soft market, insurance might be easier for contractors to obtain because insurers are in a better financial position, and many companies compete to offer policies for various types of construction insurance. A soft market is essentially a buyer's market and insurance policies are generally easier to obtain and offer lower rates, lower premiums, more flexibility and favorable terms. With a soft market construction companies have more choices in carriers and policies to serve their business interests.
A hard market makes it more challenging to purchase insurance. In a hard market, insurers may have experienced significant losses, causing prices to be higher. Hard markets can be caused by many claims, which could be due to losses from extreme weather events, many lawsuits resulting in large payouts, widespread material flaws, or even a tightening in overall financial markets, leading to less liquidity to offer policies.
Obtaining construction insurance in a hard market is more challenging, as many insurers may stop offering policies in certain areas, and pricing will be higher. Construction insurance brokers can help contractors navigate the market, determine insurance needs, and ensure compliance with contractual obligations.
Loss History
When an insurance carrier is considering the price of a construction insurance policy, the underwriters assess the risk factors of the company applying for insurance. In the context of other aspects of the company’s track record, the loss history of that company can become positive or negative factors that affect the price of the policy. Two key factors that insurance carriers consider are:
1. Loss Runs
The numbers, dollar amounts, and types of losses incurred in the company’s history relative to the business size. A reasonably long history, often five to ten years of activity, and a substantial number of claims can be enough for insurers to notice patterns and use this to assess risk.
2. Response to Losses
Records of how the company resolved losses and changed SOPs to mitigate that type of risk are positive factors. A company that repeatedly encounters the same kinds of losses without implementing changes to minimize risks could be considered a negative factor.
Insurance carriers may also consider the following when determining the price of a policy:
Types of Work in the Pipeline
Insurers gain confidence in a company that plans to continue working on the types of projects it has completed in the past. For instance, a home builder who intends to start heavy civil construction poses more risk than a company that has successfully completed civil projects. Conversely, the risk would be lowered if a contractor has had numerous losses in residential projects and plans to refocus on other types where the company has succeeded.
Location of Work in the Pipeline
Experience working in similar locations or areas is less risky than planning projects in vastly different environments, jurisdictions, or parts of the country.
Repeat Business
Owners who engage the construction company on multiple projects over time demonstrate trust in the company’s work.
Safety Plans and Personnel
Evidence of solid safety planning, safety officers, and implementation of safety plans can be a positive behavior that insurers consider.
Consistent Trade Partners
Companies that work with the same trade partners repeatedly demonstrate effective collaboration, and the experience of working together lowers the risks of mishaps and miscommunications.
Evidence of Consistent Logs
Companies that file daily logs as their standard operating procedure demonstrate effective project oversight. Operating procedures that include consistent and regular documentation show insurers that the company uses best practices for project management, which can reduce risk.
Insurers use a statistical calculation called a credibility analysis to determine their confidence in the risks identified by the loss history. Underwriters need enough information, including a reasonable number of claims, to trust that they have the information to assess the risk properly. The longer the company's history, the more credible the numbers are, and the more insurers can rely on them to determine pricing.
Assessing the many behavioral factors contributing to a company’s risk profile is somewhat more subjective for insurers, especially if reliable data is unavailable. Records that conclusively prove a company's actions to mitigate risk, like data from project management software, give hard proof of work performance around factors that matter in insurance pricing.
The Role of Technology in Reducing Claims & Costs
In the past, insurers relied on information provided by construction companies to assess risk and assign prices to policies. As companies increasingly use construction management software, they are able to provide empirical data to insurers to demonstrate the risk-mitigation strategies they employ. The documentation provided by technology platforms can turn qualitative data, such as regular safety monitoring or the use of daily logs, into quantitative data.
Just as having a gym membership doesn’t mean a person works out, having a safety plan doesn’t mean a company implements the measures listed. However, the data from construction management software platforms may demonstrate that positive behaviors reduce risks. This proof can boost insurers’ confidence in a company’s loss history and risk management.
Beyond just proving appropriate risk mitigation, the adoption of construction management software is beginning to demonstrate how technology use improves risk management, increases adherence to best practices, and may reduce what is paid out when a claim does occur. Insurers are just starting to offer price reductions of up to 25% for companies that adopt technology and demonstrate credible, provable adherence to best practices.
As more insurers come on board, favorable policy terms and pricing for construction companies that utilize effective construction management platforms may become more widely available.
Insurance That Rewards the Tech-Enabled Contractor
25% average premium savings with Procore Risk Advisors
![Illustration of worker on a cherry picker](https://www.procore.com/library/wp-content/uploads/2023/06/cherry-picker.png)
Quick Tips for Contractors
Construction companies cannot control all of the factors that influence insurance pricing, but here are some tips that can help contractors obtain more favorable rates and terms.
Operational Excellence
Keeping detailed documentation of all operations, especially safety-related activities, can give insurers confidence that loss controls are thorough and methodical. Daily logs and frequent inspections, along with effectively following up on reports demonstrate a company committed to risk mitigation.
Technology Adoption
Using construction management platforms assists in safety planning and documenting operations. In addition, technology can boost safety behaviors and make continuous improvement part of normal operations.
Safety Personnel
Insurers consider companies with dedicated safety managers on staff to be at lower risk, and this factor can help lower insurance premiums.
Consistency
Insurance companies like to see successful work performance in the regions and types of construction a company plans to undertake. Contractors who frequently work with the same trade partners and receive repeat business from owners demonstrate stable business practices and positive collaborative relationships.
Relationship With Insurers
Builders with long-term relationships with an insurance carrier can benefit from the trust. Eventually, most contractors will experience a loss, and an insurer who is familiar with the contractor’s track record will be less likely to significantly raise rates or cancel the policy.
Broker vs. Agent
Smaller construction companies may work with an insurance agent representing just one carrier. As a company grows, switching to a broker with access to multiple carriers can help mid-market companies obtain appropriate insurance. Brokers often have a broader understanding of the construction insurance market and can assist builders navigate the multiple types of insurance needed.
Balancing Cost and Risk
Insurance is a necessary risk-mitigation tool in construction, and insurance carriers determine costs based on some exposures and risks that construction companies can’t control. Understanding the factors impacting pricing can help builders align their insurance needs and operational practices to manage insurance costs and reach their business goals.
Adopting — and using — construction management software platforms can be one-way companies can focus efforts on better risk controls and offer solid proof to insurers that can help obtain the most advantageous insurance terms and pricing.
Was this article helpful?
Thank you for your submission.
0%
0%
You voted that this article was . Was this a mistake? If so, change your vote here.
Scroll less, learn more about construction.
Subscribe to The Blueprint, Procore’s construction newsletter, to get content from industry experts delivered straight to your inbox.
By clicking this button, you agree to our Privacy Notice and Terms of Service.
Categories:
Tags:
Written by
Melody Bell
Melody Bell is Director of Underwriting at Procore. Previously, she spent 15 years as Director and Vice President for managing general agents in the U.S. and London, with a focus on construction GL, SDI and professional liability. Melody holds a bachelor's degree from the University of Southern California and a JD from USC Gould School of Law. She lives outside of San Bernadino, CA.
View profileAnthony Dietz
Anthony Dietz is the Head of Insurance Brokerage at Procore. With over two decades of experience, Anthony has held several leadership roles in insurance, including Senior Vice President at NFP, an Aon company, and Vice President at Arch Insurance Group Inc. His expertise encompasses brokerage, soft skills, and teamwork, honed through his tenure at firms such as AIG, where he served as Regional Manager. Anthony holds an MBA in Management from Fordham Gabelli School of Business and a BBA in Finance from Hofstra University. Based in the New York City Metropolitan Area, he leverages his comprehensive knowledge and skills to deliver innovative insurance solutions in the construction sector.
View profileJulia Tell
18 articles
Julia Tell is a freelance writer covering education, construction, healthcare, and digital transformation. She holds a Ph.D. in Media & Communications and has written for publications including Business Insider, GoodRx, and EdSurge, as well as nonprofits, international businesses, and educational institutions.
View profileExplore more helpful resources
![article-image](https://www.procore.com/library/wp-content/uploads/2024/08/actuary-vs-underwriting-construction.jpg)
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...
![article-image](https://www.procore.com/library/wp-content/uploads/2024/05/Self_Insured_Retention.jpg)
Self-Insured Retention (SIR) in Construction Insurance Explained
Self-insured retention (SIR) is a mechanism in construction insurance policies that is often compared to a deductible. However, SIRs operate slightly differently and have unique benefits. Understanding how to navigate...
![article-image](https://www.procore.com/library/wp-content/uploads/2024/04/Construction_Underwriting.png)
Construction Underwriting: Assessing & Understanding Risk
When companies apply for construction insurance, construction underwriters are tasked with assessing risk and pricing policies accordingly. In the past, underwriters could only consider historical data, but as more contractors...
![article-image](https://www.procore.com/library/wp-content/uploads/2024/03/Insurance-Subcontractor_Default_Insurance.png)
Subcontractor Default Insurance: SDI Policies Explained
Subcontractor default insurance (SDI) is a risk mitigation tool for general contractors to control subcontractor default risk. It protects GCs and upstream parties from subcontractors who default on contracts because...