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 implement technological tools, underwriters can validate the information with contemporary performance data to assess exposure more accurately.

A more precise understanding of the factors that underwriters use to assess a company's risk and determine insurance costs can help contractors put forward a strong proposal when seeking coverage.

Factors Construction Underwriters Consider

Underwriting is a holistic process that considers a company's history, contractor qualifications and experience, loss history, work in progress, in addition to the specific exposures related to the project, size, location and complexity. Here are the primary elements that an underwriter considers when evaluating a submission.

Company Records

• Loss history: The submission should explain any significant or frequent losses and include steps taken to avoid future losses of that type.
• Financial statements and projections: Complete records demonstrate good business practices and sound financial planning.
• Value statement: The description of the company’s approach to the business should match its practices, outcomes and plans.                 

Project Experience

The work proposed should align with a contractor’s previous experience.

• Types and sizes of projects: The company should plan similar types and sizes of projects, not jumping into projects far beyond their demonstrated success.
• Geographical locations: Different municipality regulations, population densities, and climate or land features change how a contractor must operate, so similarities in the locations of builds show that a company is staying within its sphere of experience.
• Background information: Companies should include background details on their previous work and a list of projects they’ve delivered. 

Operational Practices

• Quality and Safety: Standard quality and safety measures are essential, but having project-specific safety manuals to account for differing conditions shows proactive attention to each project’s specific exposures and needs.
• Outcomes: Contractors should document successful project deliveries, client satisfaction and repeat business.
• Consistency: The business is working with the same subcontractors repeatedly.
• Operational changes: Divulge any major changes in business operations, such as working on new types of projects or working in a new state. 

Market Conditions

Conditions in construction insurance markets fluctuate. There may be less capacity in the overall insurance market when there are high numbers of claims due to large loss events like weather catastrophes or construction defect issues.

Positive and Negative Factors for Underwriting

Certain factors give underwriters confidence and more insight into a contractor’s commitment to managing risk and keeping projects on track. Contractors with a long track record in construction will have an advantage in showing a history of many completed projects and a well-established footprint in a particular region.

Contractors who have integrated technology to track project status in real-time allow underwriters to see detailed information to validate what a company claims in its narrative. An underwriter can see in detail how a construction company has handled problems, stays on budget, communicates with subs, rectifies issues on site and implements sound project management and risk mitigation strategies. Data doesn’t replace an understanding of the builder on other levels, but it provides underwriters additional insight.

One red flag for underwriters is an incomplete insurance submission that requires a lot of back-and-forth to obtain the information needed to consider offering a policy. If the information presented is incomplete, it can indicate a lack of transparency or experience, and there could be undisclosed issues. 

Putting together a complete package helps underwriters consider a contractor's insurance risks and needs, demonstrate professionalism, and make the process far more efficient.

4 Tips for Contractors Preparing for Underwriting

When seeking either practice insurance or project-specific coverage, preparing well for the process can raise the quality of a company’s submission to help unlock favorable terms and rates.

1. Start preparing well in advance.

Allow enough time to prepare documents fully, work with the broker, and then give the underwriter time to consider the submission. A rushed process can negatively impact the outcome. Begin early to get the best pricing.

2. Gather all the documentation.

Ensure all documentation is ready for the broker to share with the underwriter. Organized and readily available documentation allows the underwriter to assess the submission without difficulty.

3. Choose the right broker.

The broker acts as a partner, advisor, guide, and construction company representative. It is vital that the broker understand the construction industry and the specific types of construction a company performs.

With a clear picture of the totality of a company’s plans and needs, the broker can better advise and advocate for the contractor.

4. Tell the complete story.

Brief the broker on the company’s current needs, risk appetite and vision for the future. The submission should highlight the builder’s voice, telling the whole company story. This includes risk mitigation strategies in place, the use of technological tools to manage the construction and safety process, and explanations of how a contractor has changed their processes in response to any past losses.

Assessing Risks Through Data

Real-time data is changing how underwriters assess contractor risks, but the fundamental information required for underwriting is still needed. Underwriters have different perspectives, but contractors—as represented through a broker—should present a total picture that allows underwriters to see the business’s competence and commitment to managing operational risk.

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