Insurance Carrier Is Very Important
The demand for newly constructed buildings is strong in almost every sector of business. This means that the demand for insurance coverage from contractors is also strong. The many contractors in need of insurance vary in experience from large established general contractors to new one-trade subcontractors. A retail agent with the desire to develop a niche in this industry and build a book of business must first become very familiar with the industry. The agent may become a part of the industry by networking, becoming educated, and getting involved in the community. An important starting point in developing a prospect list may be that agent's existing personal lines clients.
The appropriate insurance carrier is very important too because the agent will need to be able to sustain the business. Currently, the insurance marketplace has many carriers with both capacity and appetite. However, if an agent wants to retain a construction industry niche long term, it is very important to study the history of the carrier in relation to the construction industry. Many carriers who are currently bullish will retreat when the market tightens. So if an agent is planning on a long-term construction niche, he or she must have one or more carriers with an established history of remaining in the market even during the downturns.
State Of The Construction Market
Expertise drives success in growing marketplace
By Dave Willis
Optimism in the construction business continues to grow, thanks to a continuing economic rebound that started a few years ago and continues into 2016. "The Great Recession applied a reset to the housing market," explains Kellam Radford, senior vice president at Distinguished Programs. "Despite meaningful recent forward momentum, overall housing starts are at early-1990s levels, and overall growth looks like a patchwork." He says areas near centers of strong economic growth, such as urban and near-suburban technology hubs, are doing much better than other areas.
"We continue to see an increase in commercial building starts and the residential apartment market continues to be hot," explains Paul Butler, president of marine at The Hanover Insurance Group. He points out that Millennials, uninterested in tying themselves to one location, are creating a strong demand for high-value apartments. "We expect this trend to continue to grow," he adds.
Ryan Scheinfeld, president of TRU's National Construction Practice, says governments of large population centers are encouraging development of their urban core via tax incentives, utility/development bond issuance, and commitments to transit. "Rental rate increases in most markets mean that even projects exceeding their development horizon can still be incredibly profitable," he notes.
According to Butler, residential home construction, while slower to return to its 2005-2006 boom levels, is picking up. "We anticipate seeing even more such activity in 2016," he notes.
Radford points out that multi-family housing grew at a much faster rate than single-family housing in 2015. "People still desire to own their own home, but ownership rates across almost all age groups are back down to the levels of the early '90s," he explains. "There's a lot of pent-up demand, but tighter credit, limited capital and general economic conditions have kept some buyers on the sidelines."
Similarly, Alan Ferguson, chief underwriting officer at US Assure, sees an increased number of first-time home buyers, along with potential significant changes in builders' schedules and project values due to increased demand. "While it's too early to predict the effect of recent interest rate movement by the Federal Reserve, consumers, including Millennials, have options to make their home ownership dreams come true-from downsizing expectations to an increased down payment to higher mortgage payments," he explains.
These options, combined with fewer distressed properties, more competition for existing homes, and many young adults looking to start their own household in a modern, move-in-ready home, present opportunities for builders, Ferguson adds. "Some builders are offering affordable entry-level or starter homes to jump-start home ownership for Millennials and first-time buyers. However, these homes often mean lower profit margins due to high land prices when compared to purchases by wealthier consumers acquiring move-up homes and luxury condos."
Ferguson identifies another important factor for builders. "A favorable industry outlook and improving job market offer potential for a drastic change in builders' schedules of work and project values," he says. "Higher demand could yield an increase in the number of starts, values and a subsequent increase in build time."
According to Curtis Kochman, senior vice president at Ascinsure, changes in the oil and gas industry will affect contractors and builders this year. "Effects include everything from revenue dollars surrounding the oil/gas and fracking boom to how contractors and builders bid jobs and account for their profits," he says. "It is also affecting transportation of equipment and costs pertaining to the jobsite."
While the construction business continues to enjoy considerable growth, a number of challenges exist. "They run the gamut," says Tim Cappellett, vice president of sales and marketing at Oryx Insurance Brokerage, "with everything from an increase in opioid abuse, which affects workers, and increases contract complexity to continued labor shortages and resulting training issues."
Tom Boudreau, vice president of construction insurance at The Hartford, adds, "Labor and technology will continue to play prominent roles in the construction industry in 2016. The ongoing labor shortage will challenge project schedules, budgets and, ultimately, construction costs." He says that to attract new workers and retain experienced ones, he expects many in the construction industry to focus on training and increased wages, although costs associated with this will impact contractor and owner margins.
"Drones, smartphones and other technological advances are potential ways to temper some of these cost increases and they'll be counted on to improve margins," Boudreau explains. "They also make it possible to provide real-time insights into projects." He notes that, while advances will affect how projects are run, these changes don't happen overnight and it will take time for true, significant positive results to be achieved.
Scheinfeld says the combination of a push to new-urbanism and the availability of qualified labor makes project execution more difficult. "In many cities, there's been a rush of development in very tight areas already somewhat constrained by available project labor, and the explosion in development has exacerbated the condition," he notes, adding that it's not entirely unusual for a project to finish with a timeline and budget of 10% - 20% beyond initial plans.
According to Cappellett, increased highway construction and housing market growth will strain an already tough labor market. "Significant labor shortages are compounded by shrinking vocational outlets and resources," he explains. "Less experienced workers account for a disproportionately large portion of lost time. The more losses a firm takes on, the higher its experience modification rate (EMR) will be, which translates into increased premiums."
"Insurance costs and finding a trusted insurance advisor and carrier also challenge contractors and builders as they grow," explains Kochman. "Carriers are constantly coming in and out of construction niches. Customers need to peel back the layers and look beyond the cost of insurance."
Radford points out that while builder sentiment on new starts and remodeling is still in positive territory, how builders engage in the market will depend on where they're located and their ability to secure credit and labor. "In regions that aren't leading the economic charge," he says, "many builders and contractors will continue to supplement their work with smaller jobs, home remodeling, and other projects."
Boudreau sees continued competition in the construction insurance marketplace. "We'd expect pricing for specific risks to vary based on characteristics of the project and risk, as well as geography," he notes.
"Within the smaller commercial builders risk space, while we've seen some changes in the players in recent years, the market is relatively stable," Radford explains. "The market has a core of strong paper and program administrators. Value, service, ease of doing business, and the ability for a single market to cover a broad range of projects are key factors in the selection of a market."
According to Kochman, a move by carriers to specialize in different construction niche markets is both "positive and potentially negative. On the positive, there are more options. With so much competition, the negative might be that carriers can't get the volume needed to sustain a profit in the niche and may exit soon."
He encourages brokers and clients to do their homework and choose a carrier with a proven track record within a given niche. "If it looks too good to be true, it probably is," Kochman notes. "Get a couple quotes. If one is far less than the others, buyer beware. Throw that quote out."
Ferguson says a lack of traditional catastrophic events, specifically hurricanes, has attracted many new entrants and launched a subtle softening of rates. "Those entrants are proving to be inconsistent with pricing and capacity," he says. "More frequent and unpredictable catastrophic events, such as wild fires, excessive flooding, wind, and tornadoes, have caused quick withdrawal by these newer entrants."
Scheinfeld also points to the specialty nature of the business and warns against considering insurance providers as commodity players. "Developers and general contractors are wise to partner with leading providers in the space, emphasizing in their analyses staying power, capacity, flexibility, engineering and risk-control commitments and talent, and responsiveness to complex claims," he explains.
According to Butler, "One area of market concern is frame apartments. The growth of high-value apartments for Millennials means that more frame apartments are being built. These tend to be tougher to write from an insurance perspective."
Butler adds, "The losses are more severe, and with the limits of projects being much higher than they've been in the past, we can expect this to continue. But experienced contractors and builders who've worked on these types of projects and have good loss prevention programs in place will continue to do well in this insurance market."
To succeed in the market, Cappellett says, "Agents and brokers need to focus on educating themselves to become better client advocates, not better salespeople. Those selling on price alone are a commodity, providing a short-cut, not a solution. Top-producing agents maintain high retentions because they consistently provide value, expertise and the ability to solve problems."
Understanding construction client success factors helps agents and brokers triumph. Such factors, he says, include: proficiency with EMRs, return-to-work programs, early claims reporting, consistent hiring practices, and contractual risk transfer.
"EMR has long been considered the litmus test in determining how companies handle risk management policies and procedures," he explains. "And while accident prevention is the best way to reduce overall injury costs, effective return-to-work programs represent the best way to manage post-injury costs."
Early claims reporting reduces the likelihood of litigation and significantly influences claims costs. "Plus," Cappellett explains, "OSHA now requires that employers report severe injuries within 24 hours."
He adds, "Updated and consistent hiring practices-including the use of pre-employment physicals and drug-testing-are a must. Successful producers provide insight on hiring best practices and job-specific preventative training."
Finally, he notes, "Unfair or unbalanced contract clauses between general contractors and subcontractors are routine. Having only a cursory knowledge of contractual risk transfer limits a producer's ability to advise and instruct prior to taking on a job."
Scheinfeld points out, "More than many other insurance verticals, a small subset of agents, brokers and underwriters have long-term construction-space resumes-and skill-sets to match. Steady, long-term accumulation of construction clients ties directly to investments in and partnerships with long-term construction industry players."
Education is key. "Well-educated agents can really differentiate themselves by showing they really understand the coverage clients need," Butler explains. "Independent agents with builders risk knowledge and experience can discuss coverages like 'loss of rental income' and 'delay and start-up costs' and will write the better contractors and builders risk business."
Ferguson stresses the importance of partnering with a construction expert offering financial stability and reliability. "Look at those with proven track records, expertise, and favorable claims history," he says. "Even though claims aren't the agent's responsibility, what happens between clients and carriers after the sale matters to their reputation, referrals and repeat business."
He encourages producers to view builders risk insurance as a commercial and personal lines product. "Don't limit the profile of a builder client," he notes. "If you focus predominately on personal lines, you have an opportunity to develop a book of builders risk business. Commercial and residential property owners are potential clients, just as builders and contractors are."
Radford points out that most agents and brokers operating in the real estate or habitational space will have clients that need builders risk insurance at some point. "Focus on your local community," he recommends. "Identify where local opportunities are. Is new construction occurring on the north end of town, for example, and who is building what? Are neighborhoods being regenerated?"
He also suggests reaching out to contractors and builders directly and using indirect sources like Realtors, creditors and even home owners. "Networking with local home builder chapters or Realtor associations can help," Radford notes. "With limited resources, this helps producers focus on the greatest opportunities."
Kochman concurs. "We focus on three niche markets: crane, scaffolding and rental equipment dealers," he says. "A good place to start is with associations dealing with your construction trade-something as wide-casting as the American Subcontractors Association or as specialized as a state-specific crane association." He also recommends networking with law firms and CPA firms that specialize in construction and getting involved in an insurance group like the Claims and Litigation Management Alliance.
Ferguson stresses the need to think digital. "While factors like referrals and personal relationships continue to weigh heavily on purchase decisions, consumers-including builders-are researching online before making important purchases," he notes.
Once business is on the books, focus on client retention. "The most successful retention strategies include multiple communication points throughout the year," says Sharon Primerano, chief underwriting officer for The Hartford's marine practice, "although writing multiple lines of business for a client is certainly also key."
Primerano adds, "Engaging a client through risk engineering is an excellent way to find touch-points on an ongoing basis." She recommends leveraging carrier risk engineering services, which can include jobsite surveys, an in-depth analysis of an organization's loss history, and a variety of comprehensive training programs, to help clients improve jobsite conditions and ultimately run a safer and more profitable business.
Cappellett concludes, "Being successful in the construction space requires more than sales acumen. The best producers provide value through education, advocacy and vision. Align with a carrier sharing a similar outlook, and a successful book of trade contractors will build itself."
|Help with claims
A major claims driver that contractors face involves water intrusion. "We come across all kinds of horizontal water intrusion, resulting from anything from roof leaks to faulty installation of windows, exterior siding, balconies, patios and garages," explains Richard Gray, ARM. "That's probably the number one thing we're seeing."
Next on the list, he says, is "improper soil conditions, where the soil hasn't been compacted correctly." Gray, who serves as national director of business development for Engle Martin & Associates, points out that insurance companies often look first at that because it's one of the main exclusions in the policy.
Less common is installation of faulty equipment. "We had a case in Arizona where a contractor installed a PVC water pipe-to code-from the main line to the house," Gray notes. "The manufacturer warned not to install the pipe where a certain type of fertilizer would be used because the fertilizer could penetrate it." Home owners complained of water odor and it took forever to figure out it was this penetration, and the builder ended up buying back two affected homes.
Gray offers tips for agents and brokers who want to help customers avoid costly claims. "Make sure your contractor and subcontractor clients have solid training programs in place," he says. "Also, stress the importance of good quality control programs and a formal practice of keeping good records for 10 years, which is the statute of limitations for many states."
He points out that a quality inspection process that's well documented can show that something was installed correctly. "If a problem does arise down the road-and that's common, considering claims might not be reported for several years-solid records can pinpoint exactly who did the work and what agreements might have been in place that address liability," Gray adds.
Dave Willis is a New Hampshire-based freelance insurance writer and regular Rough Notes magazine contributor.