With the economy showing signs of inflationary pressure, controlling costs is an increasingly important priority for many construction businesses. As if wildly fluctuating building material prices weren’t challenging enough, a growing number of contractors are encountering another area of cost concern: rapidly rising insurance premiums.
The Current State: Premiums Increase Across Many Lines
Although the COVID-19 pandemic is one factor driving up insurance premiums, it is far from the only cause. General uncertainty about the economy, rising reinsurance costs, and declining underwriting profits are also putting pressure on insurance carriers, leading to a broad-based rise in premiums across various types of coverage.
One leading national brokerage company projects that general liability rates will increase by 5 to 15 percent in 2021, with auto liability rates increasing by as much as 20 percent. Premiums for builder’s risk insurance, which pays for damage done to a structure still under construction, are expected to increase by 10 to 15 percent this year, as are premiums for commercial property insurance. One possible bright spot is workers’ compensation insurance, where rates appear to be relatively stable for now.
In addition to raising premiums, some insurers are growing reluctant to place large umbrella policies with high limits. In such situations, contractors must either accept lower coverage limits and increase their own risk exposure or purchase a separate excess liability policy for losses that exceed their general liability limits. Unsurprisingly, even more dramatic increases are expected in the excess liability market, with premiums projected to increase by as much as 100 percent for some businesses this year.
Strategies for Controlling Insurance Costs
The first step to hold down insurance costs is an in-depth discussion with your company’s insurance agent. In today’s environment, it is good business to build ongoing relationships with agents and underwriters rather than to wait until policy renewal time to get in touch.
This discussion should be incorporated as part of a broader review of your company’s overall risk management program and philosophy. A comprehensive risk assessment will enable management to make reasoned and deliberate decisions regarding how much risk the company can afford to bear on its own while still complying with any minimum coverage requirements that lenders and bonding companies may impose. Such an assessment can also help management decide whether some alternative strategy, such as forming or joining a captive insurance company, could be a viable option. (See “Should You Form a Captive Insurance Company?” on page 3 of this issue.)
Rising premiums can also affect other aspects of business strategy. For example, insurance costs should be factored into bids. They could even affect whether to engage in certain types of work at all. This is particularly important if a company starts pursuing projects that are substantially larger in size or scope than it traditionally handles.
Some project owners, especially large national clients, may also require contractors and subcontractors to maintain specific umbrella liability limits. Contractors should be alert to such requirements and be ready to reconsider such opportunities if insurance costs would reduce the potential return to be below acceptable levels.
In addition to such strategic considerations, do not overlook more basic, tactical steps that can also reduce premiums. For example, review the appraised values for equipment listed on insurance policies to determine whether they reflect the purchase price or the replacement cost for comparably used equipment. A review of local equipment auction prices can help you develop a more realistic depreciated value, which could help lower the premiums for contractor tool and equipment insurance.
This is not to say that insuring equipment for full purchase price is wrong—in fact, it could be a wise choice. But the choice should be made deliberately after carefully balancing the costs against the potential risks.
Finally, do not overlook the most important tool for holding down insurance costs: running a solid, safe operation. A strong, proactive safety program with thoroughly documented results not only helps hold down insurance premiums, it also produces a host of other essential benefits.
Although rising insurance costs can create financial pressure in the near term, prudent contractors can still find ways to navigate the uncertainty and manage the risks successfully.
Please call us if you would like to schedule a review of your risk management strategies.
PKS & Company, P. A. is a full service accounting firm with offices in Salisbury, Ocean City and Lewes that provides traditional accounting services as well as specialized services in the areas of retirement plan audits and administration, medical practice consulting, estate and trust services, fraud and forensic services and payroll services and offers financial planning and investments through PKS Investment Advisors, LLC.
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