Growth with Trouble Ahead
Industry reports continues to show growth, however signs of trouble are ahead. Architectural Billing Index (ABI) is a good indicator with data points above 50 indicating growth. August ABI was at 53.3 up from 51.0 in July and with project inquiries from Owners up as well. Growth is expected for infrastructure and roadways projects based on $1.2 Billion infrastructure bill, and continued investment in residential and commercial projects. Additional attention is being placed on design features based on changes in weather patterns.
Challenges
- Design firms continue to be challenged with recruiting and retaining key staff members. This will impact QA/QC controls/procedures efforts.
- Supply Chain is causing delays in schedules, substitutions of products and material, and design modifications resulting in increased project costs.
- Contractors have been able to substitute based on availability that could results in reduced quality and project performance.
- Inflation is increasing the cost of products, materials, fuel and labor raising the price tag for correcting any errors or omissions on projects increasing claim costs.
- Higher interest rates are making construction loans more difficult and costly. This will slow down, reduce project opportunities. Higher interest rates increase the cost of project products and material for the initial design and the cost settling claims.
- Weather volatility is placing demands on the built environment. Weather uncertainty will impact the insurance industry and could result in significant exposures to design firms. Design firms could be pulled into claims, and held to a higher standard beyond complying with current building codes based on weather patterns.
Claims
- Bodily Injury (BI) claims have been problematic predominantly on larger infrastructure projects, especially for Civil firms. Bodily injury claims fluctuate between 10-12% of reported claims.
- The entity design firms contract with the most, Project Owners and Contractors is the primary party filing claims against A/E firms at 70 – 75%.
- Economic inflation continues to have a negative impact on the industry with 2-3% increase on the severity of claims that will cause a rise in insurance rates.
- Social inflation - having an impact on claims activity above economic inflation.
What is Social Inflation?
Social inflation are claims costs that can rise above general economic inflation based on society drivers on who is in the best position to absorb the cost of claims. Unlike economic inflation which insurers can mitigate using pricing models and loss reserves, social inflation can arise from factors that are difficult to measure based on costs from:
- increase in the number of outsized awards;
- legal proceedings that take longer than reasonably expected;
- rollbacks in tort reform that overturn statutory limits on non-economic damages.
The impact of these and other issues in the legal landscape is intensified by third-party participation with funding litigation supporting their political and social views.
Impact of Social Inflation
Bottom line - social inflation drives higher claim payouts and loss ratios for insurance carriers resulting in higher premiums. The insurance lines that tend to bear the brunt of social inflation are commercial auto, professional liability, product liability, and directors and officers’ liability insurance.