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Volume 101, July 2016

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Construction Insurance Landscape

Supply and demand are both growing in the construction insurance marketplace. Because construction is booming in almost every segment, the demand for insurance is also growing. All of that growth is being met with increased capacity in the insurance marketplace. However, there is a caveat, not all insurance carriers entering the market are remaining. New entrants may be new long-term players but agents needing to place multi-year contracts may want to consider markets that have a more consistent track record.

This month's cybercast looks at the national construction insurance landscape but also some East Coast and West Coast specific concerns.

 

Robust Construction Market Provides Opportunities

Look for solution providers with deep expertise in underwriting, loss control and claims

By Dave Willis

Businesses operating in the construction sector continue to grow. Government data bear out the market's robustness. "The Department of Commerce's U.S. Census Bureau recently reported that construction spending in the first quarter of 2016 was 9.1% higher than in the same period last year," explains Mike Pilla, president & CEO, Technical Risk Underwriters (TRU).

Private residential construction surged 1.6% in March, while nonresidential construction spending increased 0.7%, he adds. "Within residential, multi-family building skyrocketed 5.6% in March," Pilla notes.

Maureen Caviston, president and chief operating officer at Partners Specialty Group, has seen positive movement, too. "The construction industry is benefiting from strong demand," she explains. "Relatively inexpensive financing and an ?improving economy in most parts of the country have led to a good deal of new construction."

Ed Pray, president of RT Specialty Construction Practice Group and RT Specialty, New York, agrees. "Lending markets are eager to back projects," he says. "After everything that's occurred over the last ten years, you'd expect more stringent controls, but I don't see that. Money's there, it's at a good rate, and construction business is booming."

According to Alex Wells, executive vice president, Specialty Casualty & Construction, for Chubb North America Commercial Insurance, "Apartment and mixed-use construction are areas where we've seen the most robust growth in the last five years. Developers and owners with 'build and hold' projects are taking advantage of increased demand and rising apartment unit rents." He also says contractors with strong reputations in the healthcare and higher education segments also have seen consistent growth.

Tom Boudreau, head of The Hartford's construction and energy insurance practice, agrees. "In the industrial sector, we are seeing a good amount of activity in new educational and hospital projects," he says. "In commercial construction, there's been increased activity in office building and in technology facilities, such as data centers." Boudreau also has seen continued growth in the sports and entertainment areas, specifically in new arena and ?stadium projects.

In New York, Pray says private work-especially residential-is strong. "It seems like you can't go a few blocks without seeing a construction crane or 'Sidewalk Closed' sign," he says. "I don't see any let-up there." At the same time, he says, infrastructure development is not as strong as people predicted five years ago that it might be. Strong construction activity has led to a shortage of skilled labor. "If not addressed, this could ultimately bring a slowdown in construction activity," Boudreau says.

Insuring contractors

Construction insurance continues to be competitive. Pilla calls it buyers' market. "There is an abundance of carriers and capacity out there, including more capacity for Nat Cat perils than in previous years," he says. "Competition is strong and a few new markets have entered the space in ?the past year."

Boudreau agrees. "The arena continues to be competitive, with a sizeable number of accounts that go to market on an annual basis." He sees contractors looking closely at carrier, agent and broker partner construction industry expertise, particularly as new carriers enter the market and experienced underwriters move to new carriers.

Pilla encourages brokers and buyers ?to be cautious when working with new capacity. "Construction projects are unlike other business, because of the need for multi-year policies," he explains. "Frequently, extensions are required that go even further beyond the original anticipated period."

He adds, "I hear stories almost weekly from brokers who can't get an extension for a variety of reasons, ranging from a carrier no longer writing the class, to an underwriter who may have paid a claim that wasn't the fault of their policyholder and decides they don't want to continue on a project."

"Competition and new entrants are a consistent challenge in an industry segment as large and complex as construction," Wells says. "Agents, brokers, developers and owners must look very carefully at the ability of firms to offer underwriting, loss control and claims expertise at a depth and breadth that truly provides solutions to their needs."

Not all regions are seeing strong competition. According to Caviston, "In New York City and surrounding counties, in particular for construction exposures involving height work, there are fewer carriers operating and rates are higher."

Wholesaler Pray agrees. "Unlike some other parts of the country, we've been blessed with a tough market in New York City," he says. "For the most part, direct markets aren't active here, except, perhaps, for the larger wrap-ups. Agents are finding that wholesalers are able to help them access markets that can help their customers.

"We continue to see increases, but where they were double-digit over the last couple of years, now we're slipping into the single digits," he explains. "Still, you're stacking many years of double-digit rate increases." He says as many carriers have left the New York market as have come into it. And coverage restrictions, particularly for smaller problem accounts or those without proper controls, aren't uncommon.

Some contractors in Western states also face challenges. "Artisan contractors involved with construction of tract housing there have fewer willing carriers," Caviston says. "These exposures often end up in an OCIP (Owner Controlled Insurance Program) or project policy covering all contractors."

In other regions, she's seeing a good deal of OCIP business for new ground-up construction projects with residential and condominium exposures. "This is especially true for frame construction," Caviston says. "Builders risk capacity for frame construction projects is available, but with a higher rate, depending on the location and the amount of separation between buildings."

Pilla points out that multi-family housing-one of the most active segments in U.S. building-has historically been one of the least profitable for underwriters. "This market continues to be a challenge to underwrite," he notes. "It's further challenged because of a serious shortage of skilled labor in many large and medium-sized metropolitan areas countrywide."

According to Caviston, "Construction companies with a fleet of heavy vehicles are likely to see an increase in umbrella pricing. Our aging roads and bridges are believed to be contributing factors in the dramatic spike in accidents and auto liability severity claims."

Capitalizing on opportunities

"Many brokers are experts in placing and servicing construction business," Pilla observes. "They're active in construction industry trade groups and have teams of brokers and client advocates. They know the different insurance industry segments and products-from GL and builders risk to professional, surety, environmental and more-and use this to properly protect their customers."

He says agents interested in growing their construction insurance business should understand the types of projects current and potential clients are building, bidding, and being awarded, as well as their backlog of work. "Further," he advises, "align with markets with the appropriate solution for your clients' needs in the long run."

Caviston says retailers aggressively targeting new business are finding success selling higher excess limits to insureds as a way to get involved in the risk. "Also, retailers with a good handle on the tougher exposures, like street and road and bridge work, will benefit from the growing need to improve our roads and bridges," she says, adding that E&S markets are willing to entertain these tougher exposures.

According to Wells, an area that's grown in popularity in the last few years is general liability-only project-specific coverage. "Many projects previously deemed too small to warrant a project-specific coverage structure are now being insured with a GL-only project policy, which leaves the purchase of workers compensation insurance to the individual contractors," he explains.

"As knowledge of and appreciation for the advantages of this structure have grown, the size of the projects it is used for has expanded to include projects with construction values of ?$5 million to more than $1 billion," Wells adds. "Deep expertise by the agent, broker and carrier is particularly important in this structure, as many of the purchasers do not have extensive experience in placing insurance coverage for construction projects."

He says increasing numbers of projects are being insured in this structure by non-traditional buyers of the coverage. "For example, we're seeing property owners, retailers, manufacturers and hospitality companies placing the GL for a project in a single policy," Wells notes. "It's historically been a structure offered through the wholesale E&S market, but Chubb offers it direct to our retailers."

Pray emphasizes the need for retailers to really know the business they're soliciting. "When dealing with a general contractor," he says, "the first thing agents should do is review subcontract agreements. Not written properly, they could come back and bite the contractor."

He adds, "Claims will come in and will be tendered to the sub, but if the agreement or contract isn't broad enough and the risk transfer is done incorrectly, they could come back to the general contractor's policy, which could lead to a higher premium. Start with the root cause-contractual maintenance-and you stand a better chance of getting the client broader coverage at a lower premium."

As a claim professional, Gene Adami, senior executive general adjuster at Engle Martin & Associates, sees the importance of solid coverage and good communication. "Delay in completion is one area where agents can bring value," he says. "When a property loss occurs, normal building work may stop so they can concentrate on loss repairs." Depending on loss severity and repair time, the project owner may experience extra expenses or loss of income.

"It's important for everyone to understand that only the insured can make the claim for the delay in completion," says Adami. "The general contractors, subcontractors or bank can't. Agents should make sure their insureds understand this."

Another area where challenges exist is in documentation. "Insureds making a claim need supporting documentation, like meeting minutes prior to the loss and a timeline of events prior to, during, and after the loss," Adami explains. "Many agents and brokers do a good job of making sure insureds know this."

Many also do a good job bringing together the general contractor and subcontractors to discuss expectations, procedures and timelines. "It's important everyone is on the same page, because the more quickly you can repair damages from the loss, the sooner you can get back to the regular construction project," he notes.

Adami points out that customers often don't realize the role endorsements play in delay in completion situations. "Endorsements can explain how to handle and measure the delay and address completion of the project," he explains. "Items like loss of rent, soft costs and how to support them, interest, premiums, and additional bonds all could be addressed in the endorsements. Agents need to make sure customers understand this."

Supporting clients

According to Boudreau, "The key to servicing construction industry clients is to know their industry better than anyone else. Construction clients consistently tell us they chose their broker or agent based on their construction industry expertise and the service level they provide. They also express a desire to learn from specialists in their industry, so agents and brokers can deliver value by facilitating opportunities for clients to hear from their carriers' construction experts."

Adami underscores the need for agents and brokers to step in and support clients when claims occur. "We've encountered situations where repairs are started, they're finished, and everybody is happy, but there's little, if any, detail to support the repairs," he explains. "Claims need to be presented properly, with detailed documentation, including repair invoices that clearly identify the damaged areas, scope and cost of repairs. Lack of information can cause a delay in payment processing or, worse yet, denial."

Pilla encourages brokers to work with underwriters and clients to help prevent losses. "The industry has so much data," he explains, "and educated underwriters know the types of losses that are preventable. There may be added cost for a client, but savvy brokers understand that the cost to prevent losses is much smaller than the clients' out-of-pocket loss when a claim occurs."

Pray concurs. "Delivering good loss prevention can make the contractor a better risk for the marketplace," he explains. "It's just like any business-if agents know their trade and they know the people they're working with, they can drive protocols and processes that mitigate loss, and that makes for a better risk, which leads to lower premiums."

The author

Dave Willis is a New Hampshire-based freelance insurance writer and regular Rough Notes magazine contributor.

 


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