Laying a firm foundation for architects & engineers
Weak economy brings about a change in perspective
By Dave Willis
With new construction activity slowing, architects and engineers have experienced a related drop-off in business. "Revenues are down rather dramatically," says Linda Deiss, vice president, RPS AVRECO. "Architects, in particular, have been going through some tough times over the past few years."
Sue Harker, vice president of underwriting, Insight Insurance Services, also has observed this trend. "They're feeling the pinch," she remarks. "Residential architects and engineers are not seeing a rebound of billings at all. The residential market is still very much in the doldrums."
Engineering firms involved in infrastructure design and those with larger civil engineering exposures are faring a little better. "We're seeing a bit of an uptick there," Harker notes. "In their submissions, these firms are a bit more optimistic in their projections."
Part of the reason has to do with government-supported programs. "Infrastructure is something we can't do without," she observes. "We have to repair our roads. The volume may not be what it was several years ago, but the work is still there, at some level."
Some architects and engineering firms are expanding their geographic reach. Others are branching out into new disciplines. "Some of our architects, for instance, are starting to perform energy audits as a part of the new energy efficiency/green movement," Harker comments. "These individuals, who may never have been involved in that type of work, are now holding themselves out to be energy specialists."
This has insurance implications, of course. "When I see someone with no experience in a certain area deciding they're going to become a specialist, it causes concern on the underwriting side," Harker explains. "Plus, the whole green movement is relatively new, so what are they promising?" To understand an applicant's risks, her firm generally requests copies of client consulting contracts. "We want to be sure they're not promising something they won't be able to live up to," she says.
Even as some firms are reinventing themselves, others are taking down their shingle and closing up shop. "Over the past couple of years, we've seen a number of firms—especially the smaller ones—close their doors and go out of business altogether," Deiss notes.
"I have probably written more ERPs (extended reporting periods) in the past year than I had done in the previous 15 years, because individuals are deciding to close their doors and join another firm or go out of business entirely," Harker adds.
A tough business climate for architects and engineers has not translated into lack of insurer interest in the marketplace. To the contrary, notes Deiss. "The insurance market is very competitive. We continue to see more carriers enter the market, and they're putting a downward pressure on rates."
Harker concurs. "The insurance market is as soft as it's ever been," she says. "In the past, we saw the cycle of a few years of the soft market, then we'd turn around and the hard market would come back. This is the first time that the soft market has continued and continued.
"It's difficult to see the end in sight," she adds, noting that, at last count, 40-plus carriers were in the A&E space. The newer carriers are buying up as much of the market segment as they can, with pricing Harker describes as "more ridiculous than I've ever seen. Established markets with actuarial data know that pricing won't last."
Deiss expresses concern that some insureds don't understand pricing and may have unrealistic expectations. "A firm may have had billings of $750,000 a year or two ago, but because of the economy, those could be off dramatically," she explains. "Maybe the firm is doing $250,000 or $500,000 now, and they think that their rates should drop dramatically as a result.
"But if you're the carrier that's been insuring them all along, you know that tail is still out there," Deiss adds. This makes renewals tough, since competing carriers may just look at the lower volume, she notes, without taking into account past activity.
Agents and brokers must walk a fine line, Harker points out. "They're in a tough spot," she says. "They know that stability and carrier loyalty go a long way, but at the same time, agents say that if they don't market a risk and seek out lower bids, somebody else will, and they'll lose the account altogether."
That said, Harker comments that most agents she works with do a good job of selling product quality and market security. "Most of our agents are very good at doing that and, in the A&E market in general, most insureds are similarly concerned, and they are very receptive to those points. They want to be with a good carrier, one they know will be there 10 years from now."
Advice for agents and brokers
In this intensely competitive market, Harker recommends that agents devote some shoe leather to drumming up business. "As a carrier, we've been trying to get out a little more, to be a little more visible," she explains. "Agents and brokers should do that, too. It's tough because everyone is so busy at their desks. But we're getting out to some of the state and regional conventions, and we encourage agents to do so as well.
"These smaller venues allow us to stand out and meet prospects in a way we couldn't at the large national conventions," Harker adds. "Of course, there's a cost involved, but if you're very focused and targeted about where you're going and what you're doing, it's a good way to drum up additional leads."
When talking with clients and prospects, Deiss says, agents should highlight their knowledge of prospects' business environment and the insurance marketplace. "Architects and engineering firms are definitely shopping for the best price," she asserts. "It's extra important for agents and brokers to have a clear grasp of the market. Do your research, know your products, be aware of options and recognize which carriers offer what choices. You need to know what sets one carrier apart from another if you're going to compete."
Keep an eye out for red flags, too. "Of course, bad loss history is a clear indicator," Deiss notes. "But also look at the prospect's market. If you find that an insured is headed toward a lot of condo business, steer them away from that." Or walk away from the prospect because, Deiss says, most carriers aren't looking for condo business.
Watch out for architects and engineering firms that wear too many hats. "Sometimes we'll get a risk who thinks he can be a jack of all trades," Deiss says. "He's designing, building, developing, and selling. The account becomes so incestuous that you can't even write it. If they just stick to what they know best, that's a better risk."
Finally, Harker advises, deliver good counsel and serve clients by pointing them to stable, responsible markets. "Carriers that have been in the market for 50 years have weathered the storms over and over," she notes. "They have tried-and-true products.
"Moving an account to a carrier that came into the market last year may save a few bucks in the short term," she comments, "but in the long run, inexperienced underwriting and claims handling can pose serious problems." Insureds—and agents—can suffer as a result.
"Sell more than just that price," Harker urges. "Yes, it's a tough market. But carriers that want to be around 10 or 20 years from now are doing everything possible to remain responsible. And in the end, that's what provides real security and protection for agents and brokers and their clients."