The headlines arrive almost weekly – construction and related costs simply have not let up their historic, relentless march upward. Do the skyrocketing construction costs have you down?
Why Construction Prices are Rising
There are numerous reasons for these uphill trends including:
- Disrupted supply chains
- Unprecedented government infusions into an already chugging economy
- Sustained periods of nearly “free” money
- Prolonged housing shortage
- Spiraling labor wages
Take your pick, right? The problem, of course, is that it’s not one or two of these issues, but rather the untimely confluence of ALL of them occurring over the last two years.
How do you Approach Insurance Appraisals in Today’s Environment?
Most people know how difficult it is to find a contractor for a bathroom repair these days.
But, what do you do when the challenge is much larger?
What do you do when you’re responsible for insuring a billion-dollar property across a large geographic area, and the reinsurers ask about your approach for adjusting those values each year?
If you’ve maintained regular cycles of onsite, physical inspections, and appraisals of the property, you’ve made a wise decision. Even in periods of less elevated fluctuations in construction costs, committing to consistent rotations of these valuations helps capture otherwise missed property changes, adds, and removals. Reinsurers of large property portfolios generally reward such investments.
What About When Properties are not Reappraised or Updated?
Historically underwriters look for simple indicators such as Government-reported inflation figures to “ballpark” an adjustment factor. These “trend” factors, over time, help keep the overall portfolio reasonably accurate until the next cycle of reappraisal, and they are certainly better than doing nothing between inspections.
The last several years, however, have presented the insured with real dilemmas when it comes to estimating accurate factors. Pair that with a hard market and double-digit rate increases, and insureds face even higher insurance costs when they true up their schedules annually.
In their recently released Construction Outlook research publication, JLL estimates that the overall increase in US construction costs was 11.7% in calendar 2021.
Their research suggests that the two main components of this figure – construction materials and construction labor – climbed 21.2% and 6%, respectively.
Whether you agree fully with the research, there are two takeaways here:
- Always take into account both material and labor costs when trying to identify and apply the “right” trend factor for your portfolio. Frequently, the focus is on materials, especially when we read about record-high lumber or steel prices; however, with construction unemployment dipping below 5% again, signals point to sustained increases in labor costs.
- It is important to stay consistent with the actual annual period you want to measure. Comparing or combining measures from two different periods will always lead to the inaccurate application of the trending estimates. If you update your values in January each year for renewals, do your best to identify the resources that give calendar year-over-year data.
Finally, we could point to at least 7 or 8 additional cost trending resources – some free, others subscription-based. In recent years, these published tools have displayed significant variance in what they predict. For instance, one nationally-recognized subscription-based source would suggest more like 17 – 23% for the same timeframe; while another we review regularly, says the true rate is more like 8%.
How do you know what’s right/accurate for your property exposures?
There is no one, single answer to that question. The type, location, and construction classification of major properties will dictate where you might look for advice.
The old adage “what goes up must come down” is being put to the test more than ever these days. When construction prices finally do begin to stabilize, it may not immediately include price decreases, and no one has a solid handle on what our new normal will look like.
While we wait, HCA continues to recommend utilizing a consistent, uniform approach to develop and apply reasonable adjustments to your property values. If you need assistance or consultation in this critical area, please contact us here.