Heavy construction—Brighter days ahead
Heavy construction contractor business looks to 2013 for growth
By Dave Willis
The heavy construction business continues to struggle, but future prospects are good. "In 2012, perhaps the key issue for heavy construction firms is the lack of a federal transportation bill," says Mike Pilla, president and CEO of Technical Risk Underwriters (TRU), a specialty underwriter serving all segments of the heavy construction marketplace, except power generation.
"Local, state and federal funding cuts have adversely affected what many believe to be much-needed infrastructure and transportation projects," he adds, noting that more than half of the revenue generated in the heavy construction industry this year is coming from the private sector. Projections call for private sector spending to increase by more than 20% in 2013.
Firms are eager for a turnaround. "The heavy construction industry operates on very thin margins," Pilla explains. "That's because there is intense competition for the relatively few projects that do exist, along with the sizeable number of bidders for these jobs.
"Strong private investment, expected economic growth and continued low interest rates will play a positive role for the rest of 2012 and into early next year," he explains. "A federal government multi-year funding package is expected in 2013. Projects are definitely there, but state and local transportation agencies need to be sure federal matching funds will be available before anything can happen."
Brent Moody, assistant vice president, underwriting, at NBIS, a hybrid MGU focused on heavy construction segments, says that heavy construction contractors are readying themselves for positive change. "In anticipation of the commercial construction market rebounding in early 2013, many insureds that were able to weather the economic times are starting to reestablish their internal teams and resources," he explains.
Moody, whose firm serves crane and rigging, specialized transportation, concrete pumping and energy service contractors, notes that a turnaround will bring with it added risk. "Managing the transition from being stagnant to ramping up for increased work volumes creates several challenges for these outfits," he explains. "For example, as work slowly increases, often times the accident rate does, as well."
"Loss severity continues to drive loss results in the heavy construction arena," says Dave Dupont, senior vice president, underwriting, for Bituminous Insurance Company, a carrier that provides a full range of products for heavy construction contractors. "A collision with a redi-mix truck or a fall from a higher elevation will typically cause more damage than a collision with a pick-up truck or a fall by someone working on a lighter construction project closer to the ground. It's just the nature of the work they are doing.
"The aging of the workforce is another issue," notes Dupont, whose clients include, among others, bridge, street and road, redi-mix, caisson and pile-driving contractors. "More experienced employees tend to have longer recovery periods from their injuries. Finding capable replacements is an ongoing challenge in this industry. What may be gained in youth may be offset in work experience."
"Owners can help control their costs by working to ensure safe work practices," says Moody. "They can do this by managing their operations a bit more closely to make sure quality of work and workplace safety remain consistent, even as workloads increase for the rest of 2012 and into next year."
Covering the risks
According to Pilla, more supply exists in the insurance marketplace than demand. "It is not unlike what the heavy construction firms are experiencing," he explains. "You have more underwriters chasing fewer projects, and that results in greater competition."
He has seen several non-U.S. based markets enter the heavy construction insurance arena in the past few years. "I believe this was fueled by the strong growth of the segment in 2006 and 2007," he explains. "But things changed dramatically in 2008, and most insurance carriers have been slow to react. Many are still looking for a share of the infrastructure market at lower rates then they originally anticipated."
Moody has witnessed heightened competition, as well. "There have been competitive situations with new market players who aggressively pursued premium dollars near the latter part of 2008," he explains. "Over time, however, some of these players have disappeared." Still, he says, some of these "soft-market competitors" are still around, which leads to continued pricing pressures.
According to Dupont, a shift is starting to materialize. "We're seeing signs that indicate the insurance market is hardening," he explains. "This varies by geographic region, but it's starting. The workers comp line seems to be in the greatest need of rate and price strengthening, and we are beginning to see this occur more in the market."
Moody adds, "As the market starts to harden following the recession, rates will stabilize. Still, we expect much of the competition will remain the same as it been has for the past five years."
The key for insurance providers, he says, is in knowing when to walk away and when to stay. "Focusing on the premium is how you lose business," he notes. "Focusing on the insured, the agent and the value of the relationship is how we keep business. In every instance, we consider the client's account and review the overall risks in order to have confidence in any rate adjustments."
Pilla points out that heavy construction is a highly specialized segment of the broader construction insurance marketplace. "It is a difficult segment to enter without engineering expertise, or at least some veteran construction insurance experts on staff," he explains.
Agents and brokers who do find themselves engaged in the market can benefit from teaming up with the right provider. "Be sure to align your customers with an insurance company that has experience with heavy construction and that knows the industry," advises Dupont. "The company should be able to provide quality service and offer knowledgeable advice that can improve employee and third-party safety, while also protecting the insureds' assets."
Communication is key, adds Pilla. "One thing I always recommend to agents and brokers is that they provide the underwriters as much information as possible," he says. "Find out what information the underwriter needs and why. An underwriter can help address issues a client may have, but only if they are able to understand a risk or exposure fully."
According to Dupont, "A low-price, low-service provider with little industry experience may get you in the door but will not help you serve a customer for long. An experienced company whose people understand the industry can partner with customers and build a long-term relationship that benefits all parties involved."
Pilla recommends that agents and brokers do what they can to support such bonds. "Introduce the client to the underwriter, so they can have a relationship," he explains. "This will strengthen the agent-client relationship and will generally result in better outcomes, especially if something goes wrong."
Moody's advice to agents and brokers is to follow his firm's approach to the business: "Be sure to service the entire account, and not just the coverage."
Dave Willis is a New Hampshire-based insurance freelance writer and regular Rough Notes magazine contributor.