Insurance Update & Design Firm Risk

What is the status of the insurance industry and developing risks for design firms? This article provides information on 10 current and emerging insurance trends, claim patterns and exposures for design firms. This material can help in making more informed decisions including how more favorable insurance terms can be obtained by implementing an effective risk management program. 
   

1.    Market Dynamics: The insurance industry is currently experiencing fluctuations between hardening, softening, and changing market conditions, particularly affecting property and commercial programs. While rate increases are moderating, the influences of inflation, storms, and other loss factors remain significant.

2.    A/E Industry Growth: The Architecture and Engineering (A/E) sector is anticipated to see steady growth, especially in transportation, utilities, and water/wastewater due to federal funding. However, challenges such as staffing demands, technological evolution, and changing project delivery methods persist.

3.    Claims Environment: The A/E insurance market is grappling with inflationary pressures affecting claims resolutions, with a shift toward firm specific rates rather than industry-wide adjustments. Larger firms with complex projects are more heavily affected by claims experiences. Residential project specifically condominiums continue to be problematic project types. Bodily injury claims have fluctuated between 10-12% of reported incidents. Claims inflation is impacting the industry with an estimated 3-5% annual increase in claims severity. 

4.    Economic Outlook: The economy has been favorable for many A/E firms with >10% growth for several years, but signs of a slowdown are expected into 2025 with year-over-year exposure growth at approximately 4%.

5.    Rate Adjustments and Capacity: The insurance market is firming up rates and retention in mid- to large-risk sectors due to adverse claims experiences. Smaller sectors remain competitive, but modest rate increases continue, 3-5%. Climate change and future weather uncertainty are projected to significantly impact the Property and Casualty (P/C) insurance industry.

6.    Litigation and Social Inflation: Litigation costs have risen due to factors like social inflation, which impacts insurance profitability. The A/E industry faces challenges from a talent shortage and increased bodily injury claims resulting in large settlements.

7.    Technological Impact: Innovation, automation, and the entry of non-traditional players in the insurance market could reshape offerings and services. The A/E segment shows potential for capacity growth, although underwriting practices are tightening with increased deductibles and rate hikes.

8.    Challenges for Design Professionals: A notable concern is staffing challenge, and the evolving standard of care concerning climate change, artificial intelligence (AI) and increased cyber risk exposures. The A/E industry also faces a shift towards design-build projects, increasing responsibilities for design firms.

9.    Market Activity and Pricing: Following years of hardening, the insurance market is softening with rate reductions. While profitability has improved, irrational pricing by new entrants poses long-term risks. Rising catastrophe events challenge pricing in insurance and reinsurance markets.

10.    Risk Management Services: Risk management services, including contract reviews, quarterly webinars, dedicated website, are highlights of many A/E insurance carrier programs. Firms that demonstrate effective risk management programs can obtain more favorable terms and rates.