Steel prices have seen considerable volatility in recent years, and with ongoing discussions about tariffs and trade restrictions, a new wave of uncertainty may be on the horizon. While rising material costs are a well-discussed challenge for builders and developers, a crucial but often overlooked consequence lies in the realm of insurance. Specifically, California's surplus lines market could be especially impacted by these fluctuations in steel prices.

Steel is not only a fundamental building material but also a key indicator of overall construction costs. Whether for commercial high-rises or essential infrastructure, steel plays a pivotal role in numerous large-scale projects. As steel prices climb, so do the total project costs, which, in turn, increases the insured values, prompting insurers to adjust premiums.

Mikhail Gorshunov explains, "In the surplus lines market, where flexibility meets higher risk, premiums tend to rise in tandem with that increased exposure."

Historical data from 2015 to 2024 reveals a clear trend: as steel prices increase, so do surplus lines premiums in California's construction sector. As seen in Figure 1, this upward movement is also mirrored in Figure 2, which shows an increase in the number of surplus line transactions. The conclusion? Rising material costs may be pushing more projects toward surplus lines, especially when they surpass coverage limits or face pricing volatility that standard markets tend to avoid.

Analyzing the Impact of Steel Prices

Our analysis underscores a strong positive correlation between steel prices and premiums in the construction sector. Specifically, for every 1-point increase in the steel price index, there is an estimated $4.4 million increase in annual surplus lines premiums in California, all else being equal.

Moreover, the study also reveals that this rise in steel prices leads to a significant uptick in the number of surplus line transactions. A 1-point increase in the steel price index corresponds to an average rise of about 85 surplus line transactions per year in California's construction sector. While this is less impactful than the premium hike, it suggests that rising material costs are nudging more construction projects toward surplus lines coverage, especially when high prices push insured values beyond the limits of admitted carriers.

Preparing for Future Shifts

If trade policies or global supply chain disruptions were to cause steel prices to rise again, we would anticipate a corresponding increase in both premiums and policy volume in the surplus lines market for California construction. Projects facing escalating construction costs may no longer qualify for standard admitted insurance, either due to valuation thresholds or the volatility of associated risks, leading to more projects moving into the surplus lines market.

To predict the potential effects of a steel price surge, we modeled a scenario using 2024 data as a baseline, assuming a 25% increase in the steel price index. Our estimates suggest that this increase could result in an additional $321 million in annual surplus lines premiums and about 6,200 extra transactions in California’s construction sector within the surplus lines market—assuming all other factors remain constant.

In summary, historical data and empirical analysis demonstrate a clear relationship between rising steel prices and increased premiums and policy counts in California's surplus lines construction market. With ongoing shifts in trade policies and supply chain dynamics, insurers must prepare for the ripple effects of material cost inflation. The surplus lines market will continue to serve as a vital safety valve, and its role may become even more critical should steel prices rise once again in the future.

Originally reported by Mikhail Gorshunov in Insurance Journal.