In an era of rampant inflation, the first question most people ask is: How much is it going to cost? But the second question invariably is: Why? Why have prices risen for this building material or to employ that tradesman? Understanding why can’t bring prices down, but it can help businesses manage through rising costs.
Commercial insurance hasn’t been exempted from similar economic headwinds. When everything has gotten more expensive – from replacing a roof torn off by a windstorm to repairing the knee of a worker injured at a job-site – the costs of insurance premiums have followed.
Michael Faith, a Technical Manager in Risk Management at Builders Mutual, identifies six top market trends that could impact coverage costs and how contractors may be able to protect themselves from ongoing inflation.
1. Labor shortages
Since the COVID-19 pandemic, construction workers have been in short supply. Many workers have begun to age out of the profession due to the physical demands, while younger workers continue to pursue careers in other fields.
To increase staffing levels, contractors have turned to raising wages, which has had only a moderate impact on recruitment while driving up costs. Some businesses have also hired less-experienced workers and placed extra demands on existing employees to fill labor gaps – a recipe for an increased risk of workplace accidents. And with greater liability exposure and potentially more worker injuries, contractors could see their experience modification (“mod”) rate rise, paving the way for jumps in commercial insurance rates.
2. Supply chain disruptions
Concerns over product availability have eased recently. Gone are the days when essentials like lumber and steel were in short supply. But certain products – such as circuit boards for appliances – can take weeks or even months to be delivered.
On one level, these types of high-demand parts are still commanding high prices, compounding claim expenses. On another level, delays can result in schedules being thrown off and project timelines stretched, leading to financial hardship for contractors and property owners. These added costs flow through the entire supply chain, ultimately helping to elevate premiums.
3. Rising medical costs
Labor shortages and supply chain issues have combined to drive up the costs of doing business for both contractors and commercial insurers alike. One cost category in particular that has affected claims is medical expenses. Thanks to treatment advances, many workers are fortunately surviving what had once been fatal injuries. Long-term care provided to these individuals – though necessary – is driving up healthcare costs, resulting in more expensive claims.
While high prices in categories like healthcare make it difficult to operate profitably, what’s equally disruptive is the uncertainty generated by inflation. Businesses are unable to plan for future purchases or investments if they don’t know what prices are going to be in the short or medium term.
4. Recession risks
While the recession forecasted by many economists hasn’t arrived, it doesn’t mean that it won’t in the coming year. During a recession, contractors may find fewer projects, which could cause them to reduce the size of their crews and cut spending elsewhere to help maintain profitability.
In this recessionary environment, safety is often one of the first casualties. Safety training may be pushed to the side, and new safety equipment purchases delayed. Limited funding for safety and risk management may create further liabilities, making businesses more vulnerable to increased losses and higher commercial insurance premiums.
5. Social inflation
Social inflation refers to larger societal trends that push insurance costs above the overall inflation rate. These trends include the increasingly litigious nature of our culture. In other words, people are more willing to file lawsuits against businesses. In turn, juries that want to hold businesses accountable can sometimes reach nuclear verdicts (jury awards exceeding $10 million). Social inflation has been a main factor in rising claim severity and rate jumps across many commercial insurance segments.
6. Extreme weather events
Natural disasters (e.g., hurricanes, tornadoes, hailstorms, and wildfires) have increasingly left businesses with significant repair expenses. For contractors, the unexpected nature of these events poses many difficult-to-manage risks. For example, a building under construction can’t be made water-tight with only a few days’ warning before a major storm. And even if certain measures can be taken to protect the structure, wet building materials can lose their integrity over time, resulting in high replacement costs.
Sometimes, workers are in jeopardy as well. Faith relates a story in which two workers were suddenly blown off a roof by a freak wind gust. Unlike lightning, which can be tracked with an app, there is no warning system for these types of gusts. One of the two workers, unfortunately, lost his life.
Weather-related claims, which have increased recently, have also contributed to higher commercial insurance premiums.
Strategies to defend against inflation
For some trends, such as weather events or a greater societal inclination to file lawsuits, there are admittedly few things contractors can do to protect their bottom lines.
But don’t give up hope. Here are a few ways to try to stay ahead of inflation:
- Protect your products. In light of supply chain disruptions, it’s more important than ever to diversify your vendors. Build relationships with new suppliers so product availability doesn’t derail your projects. Explore using alternative materials that may be more sustainable. And if your financial resources allow, consider stockpiling certain products (e.g., HVAC parts) that may be hard to locate at a moment’s notice.
- Take care of your crews. The best way to avoid labor shortages is to keep your existing crews happy. You’ll increase productivity and save on recruitment costs.
Boosting job satisfaction doesn’t always mean giving raises. For one, mentoring young workers gives them confidence in their career path. Faith knows of one large contractor that worked in restoring old buildings and created its own “mini vocational school” so its younger workers could get experience in this specialized trade. Also, provide ongoing training so workers can improve their skills and operate safely.
- Invest in safety. Contrary to popular belief, safety actually pays. Reducing injuries can help businesses control costs and potentially premiums. And with a mod rating under 1 required for many jobs, contractors will be able to bid on more projects and increase revenue.
When you need help improving safety at the job-site, Builders Mutual is here to help. Our teams of risk management consultants can work with you to develop safety programs and provide trusted safety resources. And as part of your premium, you can also receive value-added in-person or online safety trainings.
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