Construction Insurance Pricing: What Determines the Cost of Insurance?

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.

Major Factors for Construction Insurance Costs

During the underwriting process, insurers consider two basic categories when pricing a policy: 

1. Exposure
2. 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:

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.

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.

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