NFP’s Pellen: Tariffs affecting construction negotiations, increasing project extensions

By James Thaler

May 28 - (The Insurer) - NFP’s North America construction head Adrian Pellen said brokers and carriers are actively seeking to address the impact of the trade war in deal negotiations, with project extensions rising and rate relief on the table where costs are rising but exposures are not.

Pellen made those comments in an interview with The Insurer TV at this month’s RIMS Riskworld event in Chicago, where he said fresh tariffs are contributing to a slowdown in building activity in some areas, but that the market remains hot in areas like Florida.

“I don't know that we've got a silver bullet. I think that a lot of ways we've been trying to manage it is to have our clients try to quantify what the impacts of tariffs are on their construction projects,” Pellen said of negotiations between brokers and underwriters.

“So, for example, if the cost of steel goes up, can we very clearly delineate to the insurers and our other trading partners what that impact is, so that maybe there's a bit of rate relief given,” he noted.

“In theory, there's not necessarily more exposure. So, particularly for casualty projects, which can either be rated on construction value, which obviously are being greatly impacted by tariffs, or payrolls, some are evaluating what the right rating methodology is for those projects.”

He also noted that the construction insurance market is “seeing real challenges around project extensions”.

“These are projects that perhaps were already in place for a couple years, (and) depending on the scale and complexity of the project, maybe all the materials weren't on the job site yet.

“Depending on what the contractual delivery method is, either the owner or contractor (they share on the risks of what tariffs might be) are really dealing with the after effect of that,” Pellen commented, noting that projects tend to be subjected to premium audits.

“And of course, the audit may be on construction value, which has been impacted pretty substantially by the impact of tariffs,” he continued.

“It's created a lot of uncertainty, and I think it's created a lot of tension, particularly between contractors and owners negotiating who's on the hook for the impact of tariffs,” Pellen noted.

On market conditions, Pellan acknowledged construction is a fragmented market, with some softening seen particularly for wood frame construction.

“Residential construction in many pockets of the country has declined. They've actually seen weakening demand. Part of that is impacted as well by tariffs,” he said.

“But the other aspect of things is where we've seen more challenging markets are in hot areas. So, Florida is a big one. In spite of the impact of things like tariffs, a lot of big projects are very bankable,” he observed.

“We have affluent people from all over the U.S. and elsewhere, moving to South Florida, and in spite of the cost of risk and building altogether, these projects are getting done."

He also said that the onset of tariffs coupled with spending outlays from the Infrastructure Investment and Jobs Act of 2021 means that construction costs for such projects are now much higher than originally anticipated when those funds were allocated.

“The dollars are going to go a little bit shorter. The aren’t going to go as far as they once were planned, given inflation since 2021, plus what we're seeing as it relates to tariffs. Those projects have become very challenging,” he commented.

For property construction risks there remains “high demand” for limit, but that climate risk in the form of wildfires, flooding, and windstorm has added volatility to underwriting negotiations.

“There's a lot of pressure there. I think it's taking a lot more insurers to get things done. The costs are also extraordinary. We need the surplus lines markets to get things across the line.”

He added that “there's a lot more focus around what the right amount of insurance is to buy”.

“Whether you're looking at PML studies or other modelling means to really ensure that the projects aren't overinsured but are buying the right amount of insurance given the cost is increasing.

Watch the full interview with NFP’s Adrian Pellen to hear more on:

• How tariffs are contributing to a slowdown in activity and driving up costs

• Strategies brokers and underwriters are using to account for tariff impacts

• How the trade war is contributing to an increase in construction project extensions

• Softening in wood frame construction, and the need for E&S carriers in some markets

• Climate volatility impacting decisions on how much property limit to buy

• And more…