How Do Rising Construction Costs Impact Property Insurance?

With labor shortages, supply chain issues, and rising inflation, many industries in 2024 are under threat— including the construction industry. The effects of these issues are far-reaching, impacting not only construction workers and business owners themselves but also anyone who owns property and needs insurance.

Let’s explore these construction issues more thoroughly and see how they affect your property insurance.

Labor Shortages

Among other industries, construction is facing a shortage of skilled labor.

In 2024, approximately 1.9 million construction workers will leave their jobs and seek employment in other industries. To make up for this loss, it’s also expected that 2.1 million workers will leave other industries to start working in construction. However, the issue here is a lack of skilled, experienced workers.

Over 20% of construction workers are aged 55 or older, making them the most experienced but also nearing retirement. To meet demand, the industry must not only address typical hiring needs but also attract an additional 501,000 workers.

To address this, construction companies are raising wages. Over the past year, construction wages have risen by an average of 5%, with increases exceeding 8% in states like Wisconsin, Iowa, Idaho, and Utah. In Massachusetts, the average hourly wage for construction workers is nearly $49.

Typically, labor accounts for half of all expenses in a construction project. With the growth rates of wages rising in some states to attract and retain workers, construction projects are becoming more and more costly.

Supply Chain Disruptions

You’re likely aware of how COVID-19 disrupted supply chains four years ago. But the effects of this issue still linger today.

In June 2020, a survey revealed that 68% of contractors had faced project cancellations due to the pandemic, while 48% experienced project halts. Over a third of these cancellations were attributed to a lack of funding from investors, lenders, or government sources.

Beyond project shutdowns, many factories and building material suppliers closed, resulting in shortages and supply chain disruptions. At that time, 25% of contractors reported delays or disruptions due to shortages of materials, parts, and equipment.

This naturally led to a surge in material prices, which remain elevated in 2024. An analysis revealed that construction input costs were 38.7% higher in February 2024 compared to February 2020, significantly surpassing inflation rates. Iron, steel, and nickel are notably more expensive than before the pandemic. On the other hand, prices for copper wire and gypsum products are decreasing, while plastic and resin prices are stabilizing.

Aside from the pandemic, the increasing prevalence and severity of natural disasters like hurricanes and wildfires have also harmed the construction industry. Data shows a marked increase in the amount of acres affected by wildfires since the 1980s. Wildfires cost the US up to $893 billion each year.

Rebuilding efforts after hurricanes are also quite costly. Since 1980, hurricanes have cost the US $1.3 trillion in damage in total. On average, the cost of hurricane damage is $22.8 billion per storm. The number of hurricanes has been increasing, as is the number of hurricanes ranked Category 3 and higher.

These disasters not only damage property and delay projects but also disrupt supply chains when the extent of the damage outpaces supply capacity. Consequently, property insurance is affected as insurers face higher costs from storm and fire damage. In regions like the US Southeast, which is increasingly hit by severe hurricanes, the risk associated with new construction is higher than ever.

Inflation

Rising inflation rates in recent years have decreased the buying power of construction companies. Combined with price hikes due to supply chain issues and higher labor costs from a shortage of workers, initiating new construction projects has become extremely expensive.

Raw materials like steel, lumber, and concrete are increasingly costly as the prices of general consumer goods surge. Additionally, inflation drives up the cost of living, necessitating higher wages for workers.

Data from the Consumer Price Index (CPI) shows that the cost of living has increased by 3% this past year. While this is down from 4% in 2023 and 8% in 2022, it is not as low as pre-pandemic levels of 1.2% in 2020 and 1.8% in 2019. It still increases costs and poses challenges for the construction industry.

Impacts on Property Insurance

When it costs more to construct a new building—and to protect it from the natural environment—insurance companies take notice. These factors put pressure on insurers to raise premium costs to ensure they will be able to pay the increasing costs of repairing damages.

Here’s what many insurance carriers are doing to keep their businesses afloat amidst rising construction costs:

• Withdrawing from high-risk areas – Certain places, like Florida, Louisiana, and California, face a much higher likelihood of experiencing serious damage from a storm or wildfire. For some insurance companies, offering property insurance policies in these areas are no longer profitable, so they’ve pulled out.
• Passing extra costs onto construction companies – They do this by adjusting premium rates and deductibles, so the businesses are paying more out of pocket.
• Re-evaluating risks – Some insurance companies have determined they will no longer insure properties that have certain risks, such as aluminum wiring or knob and tube wiring, both of which can be fire hazards. This re-evaluation will lead to more exclusionary language appearing in property insurance policies.

Have questions about property insurance? Talk to an agent from C&S.