SPECIALTY LINES MARKETS

Starting to come back?

Opportunities exist as construction firms experience an ever-so-modest rebound

By Dave Willis

It's no secret. The U.S. economy has failed to break out of the doldrums, and certain businesses continue to struggle as a result. According to Brent Moody, assistant vice president of underwriting for managing general underwriter NBIS, "The construction industry's healing process seems to be somewhat sluggish. With so much of our economy intertwined with commercial and residential construction, the entire country seems to be holding its breath in anticipation of the latest industry forecast."

Still, industry experts are seeing positive signs. "I would say there's a slight uptick in construction," notes Bill McKernan, president of program specialist NSM Insurance Group. "Unfortunately, some of this resulted from horrible disasters. For instance, rebuilding after Sandy is providing a boost to contractors in the Northeast."

Bill Wilkinson, national casualty president at wholesaler Risk Placement Services, has observed growth, as well. "We are seeing some significant growth in construction activity countrywide, including condos and townhomes, tract-home subdivisions, Department of Transportation infrastructure work, hospitals, airport expansion work and apartment projects. Contractors' exposures are stabilizing and starting to grow, after a long period of being down."

Apartment construction is at an all-time high, he adds, due to the instability of the housing market and more conservative lending practices, he adds. "Many apartments are at capacity, which has created the need for more."

Seth Johnson, ASLI, chief operating officer at wholesale broker and specialty lines MGA Atlantic Specialty Insurance, sees bright spots in the Southeastern United States. "New construction is underway for both commercial and residential risks," he explains. "For a time, all we saw was renovation work on existing structures. Vacant commercial buildings were being bought, gutted and updated for tenants or for sale. General contractors who had historically done new, ground-up construction flocked to the renovation side, as new residential development dried up.

"Now, some old, abandoned projects are being re-started, and habitational construction is back," Johnson adds. "We have actually seen audits coming in from 2011, where additional premiums are being collected. It's been a number of years since we've seen this in the construction world."

Jeff Haynes, national construction practice leader for USI Insurance Services, says certain firms are well positioned to capitalize on opportunities. "Companies with multiple types of equipment and the ability to relocate the equipment to regions where they are in demand look to be the model for success nowadays," he explains. 

"The real driver for some regions is not related to starts," Haynes adds. "In these regions, growth will likely come from energy and government-funded projects like oilfield work in the Gulf States. Flexibility and diversity will ultimately lead to more work for firms, regardless of where their base of operations might be or what their traditional industry focus has been."

Moody concurs. "Diversification looks to be the best technique for success in the coming months," he notes. "The 2013 Dodge Outlook Report predicts that, if the U.S. economy grows by 2.5 to 3 percent, which is predicated on an increase in the job market and more lending from financial institutions, we will see an equal percentage increase in the construction industry.

"Of course, if the biggest drivers—multi-family housing, commercial building and single-family housing—get momentum, these gains will come with much greater speed and even greater positive implications for the heavy construction industry," Moody adds.

Johnson is "cautiously optimistic. Lending seems to be on the upswing—at least slightly. Old 'dead' projects are underway. And we expect continued growth in the residential remodeling world, because of the high percentage of home owners who are upside down in their mortgages."

Insuring construction firms

The insurance market is in transition, along with the construction business. "There appears to be a firming of rates," explains McKernan." Prices are going up. Casey Evans, area vice president- construction practice leader for Risk Placement Services in Atlanta, agrees. "Rates in the construction insurance market for annual policies seem to be trending upwards," he says, "and decreases or flat renewals are only reserved for the best contractors with excellent loss history."

Wilkinson is seeing more underwriting discipline resulting from poor combined loss ratios and poor investment income return. "Many standard markets are exiting certain construction classes of business, which is reducing capacity," he explains. "In addition, the standard markets are providing more exclusionary wording."

Evans notes. "There is market capacity for rolling CIPs for some larger regional and national contractors and developers that produce revenues in excess of $100 million annually." These rolling controlled insurance programs have allowed these contractors and developers to, essentially, lock in their cost of liability and workers comp for the next few years. This should give them an advantage in the long run, since the rates in the insurance market for contractors have been trending upward.

Some local challenges exist. "Labor law claims may impact New York construction, and construction defect claims may affect West Coast residential construction," Wilkinson explains. "We have solutions, but I can see where Lloyd's of London brokers will be a necessity in the coming years." Residential construction capacity is shrinking and many markets have exited the New York marketplace altogether, he adds.

Advice for agents and brokers

McKernan says retailers need to align themselves with markets that specialize in their segments of the construction industry. "Whether that's concrete contractors, street and road guys, home builders, or some other specialty, they should work with a long-term market participant," he explains.

Stability and market access are key reasons. "Agents and brokers need markets that are stable, for their own business and for their clients," he notes. "They don't want to be working with companies that jump in and jump out of the market. They need to place their business with a company that will be there in good times and bad, but most importantly, when there's a claim."

He also encourages agents and brokers to build expertise. "More and more, retail agents must differentiate themselves by becoming subject-matter experts, niche experts, in a specific industry segment," McKernan adds. "The industry has done a good job of educating clients about insurance, so more and more they're looking for added expertise. It's still a relationship business, but the end users are savvier than ever."

Johnson concurs. "Retailers who know and specialize in the construction world have an advantage," he says. "Understanding insurance forms and the nuances of running a construction business adds value, and that's an important element in the agent's or broker's success."

Client interaction is important, as well. "Retail agents need to be well versed on all the requirements of their customers' construction jobs," explains Johnson. "Many large developers require specific forms and endorsements in order to work on their behalf. Securing information up front and placing coverage with a carrier that can deliver the needed documents will create confidence with the insured and can lead to referral business."

Evans encourages agents and brokers to keep lines of communication open with construction clients. "Talk to them early on about possible premium increases, particularly when claims activity has increased," he explains. "Talk to them about all relevant insurance market updates throughout the year, so they will view you as a trusted advisor and not just someone who sells them insurance."

According to McKernan, "Construction clients are looking at a shrinking or stagnant revenue base, and they need a retail agent or broker who can give them the best value. What's the best value? It could be the best premium, but more than likely it's a matter of getting the best possible coverage."

Agents and brokers who work hard for their customers will see better retention and greater sales, McKernan adds. "It's all about hustle," he says. "The agent who works harder and works smarter is going to win. Construction firms are looking to partner with people who understand their business."