Scott Muzzy
Principal, Vice President, Business Insurance
It’s no secret that 2024 has brought with it unique economic nuances and market challenges aplenty – and the construction industry is no exception.
Heading into 2025, the sector must be prepared to navigate an increasingly complex insurance environment where formidable challenges – interest rates, cost increases, economic uncertainty – continue to reshape the landscape.
These challenges not only impact project financing and execution but also influence the cost and availability of insurance coverage, adding layers of complexity to an already risk-prone industry.
Let’s take a look at the key factors contributing to these challenges and their implications for construction professionals and insurers alike.
Influence of interest rates
The impact of high interest rates is undeniable. When it comes to the construction industry, high rates increase the cost of borrowing for projects, including loans for financing equipment, materials and real estate. This can potentially reduce project affordability and impact the demand for new construction.
Interest rates also have a significant influence on the housing market, which in turn affects construction. Higher interest rates can make mortgages more expensive, potentially reducing demand for new homes and diminishing residential construction activity.
Finally, rate fluctuations also influence construction companies’ and developers’ investment in new projects. Higher interest rates can make alternative investments more attractive, potentially reducing investment in new construction.
Increase in overall costs
Construction costs have steadily risen in recent years for reasons ranging from labor shortages and material price fluctuations to shifting regulatory requirements. In 2025, these costs may continue to escalate, putting pressure on insurance premiums and coverage limits.
Project delays and disruptions are another frequent challenge. Construction projects are often prone to delays and disruptions due to factors such as weather conditions, labor disputes, supply chain issues and unforeseen events. These delays can result in increased costs and potential disputes between project stakeholders. Insurers will need to assess the impact of project delays on insurance coverage and claims.
Natural disasters have also become a significant area of concern. Climate change is expected to increase the frequency and severity of natural disasters, such as hurricanes, floods and wildfires. These events can cause significant damage to construction projects and infrastructure, leading to higher insurance claims and potential coverage gaps. Insurers will need to assess and manage these risks effectively.
Rise of premiums
Naturally, higher insurance costs can eat into construction companies’ profit margins – especially if premiums increase without a corresponding rise in project budget. In the short term, this can introduce difficulties for companies looking to invest in growth. That said, a lack of appropriate coverage also introduces increased exposure to risk as well as the potential for costly financial losses.
It remains crucial for business owners to work with their insurance partners to strike the right balance, ensuring their coverage provides the appropriate level of risk management for their business needs while also keeping the bottom line in mind. This can protect against potential liabilities, accidents, property damage and other unforeseen events.
Insurance costs can also influence the selection of contractors by project owners, who may prefer contractors with lower insurance costs to reduce overall project expenses. This can create a competitive environment where contractors need to manage their insurance costs effectively to remain viable in the industry.
Economic uncertainty
The construction industry is particularly sensitive to economic downturns, and recession conditions pose significant challenges.
During a recession, there is often a decrease in demand for new construction projects. Economic uncertainty and reduced consumer spending can lead to a decline in residential, commercial and infrastructure construction. This can result in a decrease in the number of new projects available for construction companies, leading to reduced revenues and potential layoffs.
As the number of construction projects decreases during a recession, competition among construction companies intensifies. Companies may be willing to bid on projects at lower profit margins to secure work, leading to increased competition and potential downward pressure on prices. This can make it more challenging for construction companies to maintain profitability and may require them to find ways to differentiate themselves and provide value-added services.
Economic uncertainty during a recession can cause project owners to delay or cancel construction projects. Financing may become more difficult to secure, and investors may be more cautious. This can disrupt construction schedules and lead to a decrease in the number of active projects. Construction companies may face challenges in managing their project pipelines and maintaining a steady workflow.
Even with those considerations, it’s important to note that the severity and duration of a recession’s impacts on the construction industry can vary depending on overall economic conditions and the specific factors influencing the market
Transform challenges into opportunities
Marsh McLennan Agency understands how today’s economic climate affects the construction industry. Our expert-led team is ready to help you transform these challenges into opportunities to help your organization work toward its short- and long-term goals.
Discover our comprehensive range of business insurance, employee health and benefits, retirement and private client insurance solutions tailored to both businesses and individuals. Connect with a Marsh McLennan Agency representative today to explore how we can serve your unique needs.
