Construction
Hard work is the backbone of the construction industry. Any agent or broker placing insurance coverage for the construction industry must also be prepared to work hard. The insurance marketplace is open but it often has restrictions and increasing premiums. The geographic restrictions and acceptability will vary not only at a regional and state level but all the way down to a zip code level as carriers define what they will and will not consider. Market knowledge and thoroughly understanding a particular client's business is vital to placing the right risk with the right carrier.
This month's cybercast explores the complexity in placing construction business during this improving economy. It also examines markets for architects and engineers, their importance to the industry, and the direction this class of business is taking.
Building a better construction insurance business
Market picks up, but agents must build an expertise, cultivate underwriter trust
There's little doubt that the construction business is better off today than it was just a few years ago. "Builder confidence in the market is up, thanks to low interest rates and improving local economies," explains Steve Florian, director of commercial lines underwriting at Harleysville Insurance. "Trade contractors are adding employees as more work becomes available." He says construction is Harleysville's largest market segment and the company focuses on a broad range of small to mid-sized trade contractors.
Also seeing an uptick is Tom Murphy, RPLU, ASLI, vice president at Quaker Special Risk. "Over the past year we've seen a definite increase in new home starts along the Eastern seaboard, where we write the majority of our business," he says. "With existing home inventories decreasing in many markets and home prices rising by double-digit percentages in the past six months, buyer urgency has picked up." Residential construction makes up a significant part of Quaker Special Risk's contracting business.
Murphy says builders are starting construction on more single-family homes, as well as apartments and townhome/condo developments. "Home prices and new home starts are still well below their 2006 peak, so it's a 'soft' recovery," he notes.
Superstorm Sandy has increased residential construction activity in the New York/New Jersey area. "The rebuilding process will extend for the foreseeable future," Murphy says. "Whether it is building new homes on stilts or higher ground, razing and remodeling existing homes, or gut rehabs from storm damage, the work required is extensive."
Tim Cappellett, vice president of sales and marketing at Oryx Insurance Brokerage, sees signs of growth in many construction segments. "As a whole, the industry is starting to pick up," he says. "Not only are general contractors getting more work, but artisans and other subcontractors are too. It's not a boom economy like we had before, but growth is steady."
According to Cappellett, whose firm focuses exclusively on construction risks, there's still some market hesitancy. "Not a lot of capital is finding its way in, and fluctuating interest rates may be tempering the growth," he says. "We're seeing some leveling out in parts of the business."
An exception is government contracts. "We continue to see federal money being spent on transportation projects," he remarks. "That includes street and road activity—paving and repaving projects—and bridge work."
Bill Wilkinson, national casualty president at Risk Placement Services, sees increases in several construction segments. "We are seeing an uptick in infrastructure, such as bridges and roads; apartment construction, due to instability of the housing market; airport expansions; stadium construction; condo construction, primarily in Texas and the West; and nursing home and hospital construction," he says. Revenue for his operation, which specializes in difficult-to-place general liability, umbrella and environmental coverages, is up by more than 20% year to date.
In some areas, a turnaround is just starting. "The tract home, townhome and condo construction market in the Southeast has been fairly dormant until recently," Wilkinson notes. "We are now seeing new residential subdivisions being built, and have even been asked to re-quote several new condo construction projects in Florida."
In heavy construction, competition is strong. "Public budgets are tight, and the number of bidders per job remains historically high," explains Rick Keegan, president of Travelers Construction. "Some contractors have taken a second look at their operational and geographical scopes. For instance, because of oil and gas industry expansion in many parts of the country, some contractors are seeking work supporting that and the necessary infrastructure related to it."
Keegan says skilled labor shortages are occurring in heavy construction. "The industry needs to replace some of the highly skilled equipment operators who have left the business or are due to retire," he says.
Brent Moody, assistant vice president of casualty underwriting at NBIS, adds, "Driver shortages are a challenge, especially in Texas. Turnover in the region is high, as the highest caliber drivers are moving to the most lucrative employers." Moody notes that revenue and mileage estimates are up for 2013 and 2014, and many companies are growing by acquiring owner-operators instead of purchasing new equipment and hiring additional employees.
According to Keegan, skilled labor shortages have both short- and long-term implications. "The long-term implications are obvious," he says. "Companies need skilled workers to remain profitable." Short-term implications are less obvious. "Worker and fleet safety practices, employee morale, efficiency, and fulfillment of contractual obligations all could be negatively impacted if firms can't hire safe, reliable employees," he comments.
Keegan says work zone safety practices continue to get significant emphasis in heavy construction. "The U.S. Department of Transportation just concluded its 11th annual 'National Work Zone Awareness Week,'" he says. "While more must be done, the campaign is having a positive impact on work zone safety awareness from both the public's and industry's standpoint."
Insuring contractors
As growth varies in the construction market, so does construction insurance pricing. "In years past, we've seen hard markets extend across all lines," Cappellett observes. "Today it's line by line. For example, the umbrella market was hit very hard last fall."
Florian says, "Premiums are increasing in the range of 6% to 10% due to growing payrolls and carrier reaction to loss trends. More policyholders are shopping renewals given these increases." He says the New York metro area is seeing the biggest increases as carriers respond to increasing New York labor law claims.
Murphy sees the same trend. "The New York insurance market is quite difficult for many classes of contractors," he says. "Availability of coverage that includes labor law claims in New York is limited, leaving agents and brokers with fewer options and typically higher rates for their insureds."
Florian points to a growing trend toward higher general liability limits. "This is driven by construction contract requirements, umbrella reinsurers, and liability requirements from municipal authorities issuing building permits," he explains. Also, more upper-tier entities are making stringent demands on subcontractors relative to risk transfer through contractual indemnification, waiver of workers compensation, waiver of subrogation and additional insurance requirements.
"Some carriers have chosen to restrict coverage with Action Over exclusions, which can prevent general contractors, construction managers or owners from transferring a loss to a negligent contractor," says Murphy. "Certain carriers don't clearly identify these exclusions but simply refer to 'Additional Conditions Endorsements.' This could leave some general contractors, developers and trade subcontractors potentially unaware of the serious exposure that they are 'self-insuring.'" Wilkinson says he is hearing that New York courts may not uphold these exclusions.
Another trend is affecting many paper general contractors, who subcontract all or most of their work. "Many are seeing the CG 2294 'Damage to Work Performed by Subcontractors on Your Behalf' exclusion added to their GL policies," Murphy explains. "Some carriers use proprietary forms, and it's difficult to determine whether the exclusion has been added."
Previously, paper general contractors may have had coverage for damage caused by subcontractors because it was an exception to the "Your Work" exclusion in the ISO wording, he notes.
Cappellett says competition is growing in some insurance lines. "Workers comp combined ratios have been coming down and we're starting to see carriers quoting in territories they had closed off before," he explains. "There's cautious optimism that they can get rate, where appropriate."
For comp and other lines, carriers are managing underwriting more closely. "They're taking a county-by-county or zip code-by-zip code approach," he says. "They're getting very granular." He's seen risks in otherwise acceptable territories declined because they're in zip codes that have been unprofitable or have seen adverse loss development.
"We're also noticing more use of predictive modeling, something we've been doing for years," Cappellett adds. "It's healthy for the industry, but it can frustrate agents. Carriers want more data, but that doesn't mean they'll quote a risk, even if they get all the requested information. The data just helps underwriters analyze risks."
Moody has seen some market contractions, at least for specific lines in selected areas. "For example, a number of carriers have pulled out of commercial auto, particularly in states that have been identified as riskier," he notes. "If carriers do entertain business in these areas, often they're increasing rates per vehicle."
This leads to extra work for agents and brokers. "Producers find themselves marketing clients heavily to carriers in an effort to find an alternative market that just wants modest increases," Moody explains.
Keegan sees more contractors becoming interested in loss-responsive programs and customized risk control services from carriers and agents. "We're also seeing more interest in Contractor- Controlled Insurance Programs (CCIPs)," he says. "This is largely driven by the need to ensure consistent coverage terms for a particular project."
He also points to an increase in the use of GPS telematics to track workers. "This is becoming pretty much standard," he says. "Firms that use telematics effectively to promote safe driving practices should see their long-term auto and workers compensation loss costs go down."
Wilkinson says that, with some exceptions, plenty of capacity exists in desirable classes and favorable jurisdictions. "This is holding rates down," he notes. The biggest E&S opportunities he sees from a primary general liability standpoint involve projects ranging from $10 million to $50 million.
"These projects are typically smaller than what a traditional OCIP/CCIP market wants to entertain," Wilkinson explains. "General liability and excess, including pollution and professional coverage, are our biggest opportunities for smaller projects."
He notes that contractors' pollution liability coverage is being contractually mandated more frequently. "We're seeing a rise in our CPL writings," he says. Claims also are a concern. "What our next EIFS (synthetic stucco), mold or tainted drywall claim issue will be is anyone's guess," he remarks.
Blueprint for success
Agents and brokers who understand construction risks and construction insurance can do well. "Post-Sandy opportunities for agents and brokers on the liability side and the builders risk property side are enormous," Murphy notes. "Many retired paper general contractors have started up new operations and are bringing back together their long-trusted subcontracted trades. They expect to be busy for the next couple of years."
He says agents and brokers with construction risks should work with superior carriers and program specialists. "Selecting the best insureds, with tight underwriting guidelines and strict adherence to proper contractual risk transfer, is key to writing profitable construction business."
Florian adds, "Construction payroll growth is great news, but that can lead to less experienced workers entering the field. This is the right time to use carrier risk control services to augment existing client safety training."
A hardening insurance market calls for greater expertise on the producer side, says Moody. "The 'shotgun blast' approach to marketing—sending a prospect to every available market so multiple carriers battle it out—isn't effective in this climate," he says.
"Agents and brokers need to be more thorough in presenting and marketing risks," he adds. "Now more than ever, producers must truly 'sell' prospects to insurers, as the options available are much more limited than even six months ago."
"Knowledgeable agents should provide an overview of exposures, prior loss experience, safety programs, and risk transfer requirements that get the underwriter's attention," says Florian.
"You need to be able to explain to underwriters why they should take on certain accounts, what's good about them, and how they can be profitable long-term customers," adds Cappellett. "That's easier to do that if you have strong relationships with underwriters."
Florian encourages agents and brokers to stay current with changes in the construction marketplace. "Staff should be fully educated on the insurance requirements clients need to fulfill for bids, so proper coverage can be secured from the right carrier," he says.
Staying on top of client activities also is important. "Get copies of contractual agreements signed by clients," Florian says. "This will let you identify and resolve gaps in coverage resulting from expanding insurance requirements and other risk-transfer clauses."
Murphy says, "Limitations and exclusions used by certain carriers offer savvy agents and brokers a huge opportunity to land new risks, as they can solve coverage gaps and educate clients on potential pitfalls of their current coverage."
Agent expertise in specific construction markets builds trust with contractors. "A good example is understanding the major differences between the standard construction contract and the more common Master Service Agreement used by the oil and gas industry," Keegan comments. "As contractors explore opportunities in that industry, they need to know how indemnification provisions differ from what they are used to."
Another example is accelerated bridge construction. "We see many positive aspects to this emerging technique, in terms of both productivity and work zone safety," Keegan notes. "Partnering with a carrier that has an extensive breadth of product is also important in order to efficiently serve a client's needs over the long term."
Moody says agents and brokers should encourage clients to increase participation in their insurance programs. "Taking on a deductible or a self-insured retention can, for larger companies, offset or reduce proposed rate increases," he explains.
Producers also should be sure that clients and prospects have controls in place to manage growth. "Insurance carriers are especially interested in hiring and management practices, which can help them gauge whether increased business activity will correlate with an increase in claim occurrences," Moody says.
"The construction industry is always evolving and responding to legal trends, economic forces, regulations, emerging construction techniques and a host of other things," Keegan notes. "It is imperative to be knowledgeable about the challenges faced by contractor clients and prospects. Partnering with a carrier that specializes in the industry can give agents and brokers a major edge and can help strengthen their client relationships."
Cappellett sums it up like this: "Know your client's market, and be educated in the product you're selling. Know your underwriters and what they want. Really focus; that's how we've been successful over the years. Instead of being a jack of many trades and master of none, focus your time and energy and training on one thing. Be known for it, and be better than your competitors." n
The author
Dave Willis is a New Hampshire-based freelance insurance writer and a regular contributor to Rough Notes.
Architects & engineers: Signs of better times
Underwriters adapt their forms to a changing field
Over the past year or so, many architect and engineering firms have seen an end to the revenue declines they'd experienced since the start of the economic slump in 2008. "There had definitely been a drop-off in revenues among the firms we specialize in," notes Rebecca Accardo, program manager for Architects & Engineers and Oil & Gas Consultants at Freberg Environmental Insurance. "Now, that appears to have leveled out a little bit."
She says her firm continues to see consistent submission activity, but growth among some design businesses has been slow in coming. "Some of the independents are struggling," adds Accardo. "They may not be getting the business right now like they used to."
Other firms are doing better. According to Kermit Baker, chief economist for the American Institute of Architects, revenue at architecture firms rose for a number of months before falling off in April of this year. In a news release, Baker says the recent slowdown seems to have hit firms in the Northeast and Midwest hardest. Anecdotes in the release indicate that business is "steady, but far from robust" and that "sequestration has created a huge gap in work" for those that practice in the government sector.
Sam Kravitz, MBA, RPLU, senior underwriter at Insurance Innovators, Inc., says one trend he's seeing in the architects and engineers space involves a shift to more design/build activity. Design/build is a method to deliver a project that features design services and construction services contracted by a single entity, instead of the appointment of a designer for a project and the separate appointment of a contractor. "More general contractors are hiring design staff in-house," he explains.
"Two or three years ago, we saw more of the stand-alone architects or engineers," he adds. "We didn't see as many applications for general contractors or project managers with design capabilities. Today, we are seeing more general contractors and more non-traditional architects and engineers."
Recently, after sending an agent an A&E application for a construction management client, Kravitz had to confirm with the agent that it was, indeed, the correct application and that it reflected a shift in the firm's activities.
Another trend taking place in the architects and engineers marketplace is increased interest and activity in what are described as "green" projects. "We're seeing LEED-certified projects, including projects with green roofs, for example, becoming more and more prevalent," explains Devin Wright-Peterson, senior underwriter at Insurance Innovators, Inc. LEED stands for "Leadership in Energy and Environmental Design" and is a collection of ratings for the design, construction and operation of green buildings.
Insurance concerns
Insuring architects and engineers is seeing a bit of a shift, as well. "In a soft or softening market, design firms expect to see some premium reductions," explains Kravitz. "Of course, when their receivables or revenues go down, they want a reduction then, as well. For the past few years, firms saw their revenues shrinking at the same time the insurance market was soft or softening, so they expected even more of a reduction." And they've been getting it.
Now the insurance market is firming at the same time the downward revenue slide for architects and engineers has slowed or been reversed. "We are seeing revenues starting to go up among our clients and prospective clients," he notes, "and we are actually selling premium increases now."
Accardo has seen insurance pricing start to turn the corner, as well. "We've seen a leveling out of rates and actually are seeing them start to go up," she explains. "Part of that is the market cycle, but part of it is increased claims activity, as well."
She attributes some of the increase in claims to economic conditions. "In tougher times, claim frequency can increase significantly as insureds struggle to handle issues and may turn to their insurance coverage sooner or more often than they normally would," she explains. "Also, in a competitive marketplace, product quality may diminish with ever-increasing workloads and lower bottom-line results."
Accardo says she believes carriers have very little choice but to start pushing up rates. "We're hearing that, although we've not had to do this, some carriers are implementing coverage restrictions, or they're planning to do so," she explains. "Even so, it's still a competitive market."
Kravitz concurs. "We're still seeing more carriers getting into the space," he explains. "We've even seen some large carriers—those with a big presence in the property/casualty arena—roll out what I consider to be some pretty aggressive A&E products."
Even with the potential for coverage restrictions on the horizon, some carriers are expanding what they cover. "Some of our A&E carriers now have the capability of including some pollution coverage," explains Wright-Peterson. "A number of our markets are looking to put the pollution in there where there is a professional exposure.
"Of course," she adds, "it's up to the insured to decide whether they want that coverage in one policy, where their limits may be eaten up a little faster if they have a loss, or whether they'd actually prefer to carry a separate policy and pay the separate premiums but get more limits."
Kravitz has recently seen an architects and engineers policy with a technology add-on. "We have seen some clients—process engineers, for example—that are integrating design into machinery and assembly lines," he explains. "That could incorporate software components, for instance. One carrier started offering coverage for that. And once one offers something, others tend to follow pretty quickly."
Another carrier has come out with a design-build form this year. "They used to just endorse the A&E form, but now they have an actual form for design-build," he says. "We may see more carriers offering something like that going forward."
A role for agents
"Architects and engineers really is a specialty line," explains Mitch Sellett, CEO of Architects and Engineers Insurance Company. "In general, it's best served by specialty brokers who understand the practice of designers. Simply treating it like you would treat auto coverage or workers comp and selling it the same way turns it into a commodity product, which isn't really good for anybody."
He says it's possible to build expertise in the business. "A great way to become educated on the practices of designers is to participate in their professional associations," Sellett explains. "Both the American Institute of Architects and the American Council of Engineering Companies are great forums for people to learn about the craft of design.
"That knowledge will help agents and brokers better understand the issues designers face," Sellett adds. "This increased knowledge will allow them to better assess the risks and align clients and prospects with carriers they believe will do a good job for them."
Kravitz encourages agents to explore where gaps might exist. "For example, those that are not the traditional architects and engineers—the general contractors or construction managers—may not have the professional design coverage," he notes. "We are seeing quite a bit of first-time coverage requests."
He adds, "Talk about pollution and professional." Insureds trust their agents and brokers to make sure they're covered. If the agent doesn't realize there is professional exposure, that could be an issue."
Accardo encourages agents and brokers to be armed with client information when working with underwriters. "Be aware that the carriers are going to ask for more information about the risks than they may have asked in the past," she notes. "Make sure that you know your clients well so you can provide that information."
Wright-Peterson reminds agents and brokers that the market is evolving. "Carriers are responding to trends and to the competitive landscape," she says. "They are keeping track of changes in their clients' businesses and are coming out with policy wording and changes to address the new exposures."
Accardo adds, "It's important to be as knowledgeable as possible about the marketplace and about the products that are available. If you aren't sure of something, call your underwriter."
Kravitz encourages agents and brokers not to ignore the wholesale market. "There may be large, standard carriers offering the coverage, but it makes sense for agents to consider all of their options," he notes. "Wholesalers can access dozens of carriers that know the business and that can offer good coverages and layers, at very competitive rates."
Sellett says, "Anything brokers can do to differentiate carriers by variables other than price is in everyone's best interest. I know that's kind of motherhood and apple pie, but I believe it's important. Consider the carrier's commitment to the space and its track record of writing the coverage responsibly over time. And communicate this with clients when you're helping them select a carrier."
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