Specialty Lines Markets

Positive signs begin to emerge in construction arena

High-end residential, apartments and some other classes are starting to grow

By Dave Willis

Despite an ongoing difficult economy, higher than normal unemployment and tight credit, some segments of the construction business are showing signs of a comeback, albeit a modest one. Overall contract volume remains low and contractors report that margins remain under intense competitive pressure, according to a recent Lockton Construction Market Update. Still, the report says, there are a few pockets of growth.

Michael Walsh, vice president at Quaker Special Risk(QSR),a wholesale insurance broker and MGA, sees a bit of an uptick, particularly in the high-end residential market. "Work on mid-sized multi-unit projects—more so apartments than condos—also is starting to pick up," Walsh says.

In Florida, Seth Johnson, chief operating officer of wholesale broker Atlantic Specialty Lines, is seeing some of the same, but mainly in terms of rehabs, not new construction. "Folks who have cash are buying vacant dwellings, fixing them up, and then putting them out on the market as rental units," he explains. "This is generating some work to rehab teams, if you will—electricians, plumbers, framers, and other smaller contractors.

"We're not seeing new residential construction to speak of," he adds. "Some contractors are buying insurance policies just to keep their licenses active but, in general, land that had been slated for development now is being reclassified as vacant land."

Johnson, whose firm specializes in MGA binding authority business, is seeing a little more activity in certain commercial segments. "Projects that some builders have had to walk away from due to lack of funding or sales, are now being funded again," he explains. "Also, we've seen people come in and renovate some of the strip malls and put new businesses in them."

Prolonged economic challenges have led to staffing changes among construction firms. "Some of the bigger firms have been downsizing," explains Todd Kurz, marketing specialist with MidAtlantic Insurance Services, a wholesaler that operates in 27 states. "And we're seeing quite a few more smaller firms come in the door." Some of these smaller operations are led by individuals who left larger companies.

Insurance changes

Segments of the construction insurance market are starting to show minor shifts, as well. "The New York market appears to be going through a contraction," explains Walsh. "Several carriers have pulled out or pulled back on what they are willing to write. And several are increasing minimum premiums, at least in certain cases.

"Outside of New York, the admitted market is still very active in writing classes of construction business that had historically been placed in the E&S market," Walsh adds. QSR sees an increasing opportunity countrywide to provide coverage for general contractors, along with some higher-hazard trade contractors, such as roofers.

Property rate increases have started to materialize as well, according to Kurz. "That's pretty much across the board," he explains. "We're also seeing workers compensation rates going up, too."

Johnson has seen some of the smaller carriers in Florida start to boost rates on some artisan classes. "It's admitted business," he says, "but we have seen them take pretty substantial increases on different lines of business, which tells me it's been underpriced and they've experienced some losses on those classes."

Lockton expects the construction insurance market to be in transition toward increased rates in 2012. But until the market experiences sustained underwriting losses, material decline in surplus and capacity, and a tightening in the reinsurance market, the reportsays, the market will continue to be stable and available for consumers.

Successful approach

Given these facts, Johnson says agents should continue to see favorable options for construction firms, at least in his markets.

Kurz encourages agents and brokers to ready themselves for increased activity. "Give it a couple of months," he says. "There's always an uptick in contractor applications in the spring, but I think this year it's going to be a little more than we've seen in the past, across the board. There's a little more optimism out there."

He advises agents to start talking to current insureds. "They all have friends," he says, "and people in the construction business all subcontract with other people." He also encourages agents to focus on existing clients. "More and more contractors are starting to shop their insurance," he says. "Agents need to have strong relationships with current insureds to keep their business."

Do this by offering contractor loss control services—directly or through carrier partners—and by paying close attention to claims. "If your contractor has had a claim, follow up," Kurz says. "Make sure they're handled properly. Keep your customers happy. There's no reason to go out and write a bunch of new accounts if you're losing the old ones."

Walsh urges agents and brokers to pay close attention to policy forms. "Every GL policy is not the same," he says. "Carriers have multiple limitations and enhancements at their disposal when underwriting an account. Products are not identical, and that holds true for policies provided by the same insurance company. Make sure your wholesale partners are construction specialists that can point out the strengths and weaknesses in the contracts offered."

Pay attention to client paperwork, too. "We try to be proactive and have agents get a copy of the contract the customer is entering into, so we can choose markets that can tailor their policies to the insureds' needs," Johnson says. "By getting information on the front end, we can make sure we get them to the right market."