2021 has been a remarkable year for the construction and builders risk insurance market. In preparation of the final quarter of the year, we researched important trends for you to consider when preparing for the upcoming months and into 2022.
Here’s what you need to know about three key areas impacting the commercial insurance and construction market.
Commercial Insurance Market Trends
Commercial insurance market rates continue to increase. Specifically, commercial property rates from January to May of 2021 are at 9.6%. While that’s an increase from last quarter, it’s significantly lower than the upsurges we saw during a previous 18-month cycle where some reinsurance renewals were as much as 25 to 35% higher in one renewal cycle. The continued increase of commercial property insurance rates will impact commercial buyers via higher premiums, less capacity, and stricter underwriting terms.
In addition, inland marine insurance – which covers products, materials, and equipment when transported over land – saw a 4% increase in property rate. Also, construction overall grew about 6%. COVID-19 has led many Americans to rethink where and how they live, contributing to the spike in overall construction.
Year-Over-Year Construction Expenditure Trends
Construction expenditures tell a different story when comparing residential and non-residential construction. Total construction expenses for both private and public construction have increased by 7.5% compared to last year. This growth can be largely attributed to the increased cost of building materials, such as concrete and brick, and the related supply chain delays. Over the last year, the cost of lumber and plywood has increased by almost 30%.
Private construction costs have increased by 13%. However, residential construction has proven to be a key driver of these expense increases, surging by nearly 30%. This increase in single-family housing can be attributed to historically low mortgage rates and the desire to move due to COVID-19.
Similarly, there are some double-digit increases in the private sector with respect to lodging, education, religious, amusement and recreation costs. These increases can be widely contributed to the pandemic. There has been some improvement through the first five months of 2021 as those double-digit increases are roughly around 5% compared to January.
Conversely, the public construction market, including buildings like capitols, courthouses, police and fire stations and other public facilities, has decreased by approximately 9%. This decline can be attributed to drops in public safety (-39.7%) and transportation (-10.4%). Typically, these divisions would have been hit harder by the COVID-19 pandemic. Currently, these segments are either stagnant or growing at a slower rate than their private counterparts.
Residential Construction Trends
Home construction remains a hot topic in the industry today. Many experts contend that the United States has a housing deficit of nearly five and a half million homes. This housing deficit has primarily been fueled by a decade of underbuilding and lackluster performance. Not enough homes were built to keep up with household formation growth, aging inventory, and / or for homes that were wiped out by natural disasters such as the wildfires in the West.
Many industry experts believe that it would take nearly 10 years of 2 million starts per year to close the housing gap. This rate is considerably higher than the long-term historical average of approximately one and a half million new homes built per year. At these levels, the construction industry would create nearly 2.8 million new jobs and account for more than $400 billion dollars in economic activity.
Overall, this is fantastic news supporting the claim that the construction and builders risk industry is as strong as ever and has positioned itself as a key driver out of the recent economic downturn.
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