The construction industry is rebounding or possibly the rebound in the construction industry is leading an improving economy
This is a good month to look at contractors. Thanks to the improving economy, the construction industry is rebounding or possibly the rebound in the construction industry is leading an improving economy. In any event, business is booming!
Contracting growth is multifaceted. Multi-family units are in the lead but single family units are close behind. In addition, many homeowners are remodeling because of increases in home values and loosening of credit. Existing contractors are growing but there are also many new startups. Agents who take the time to understand their clients, the coverages, and the existing marketplace can expect to have a successful year.
One of the most important partners an agent can have in building a contracting book of business is a strong surety company. All contractors need a variety of commercial bonds and some need contractors bonds. The agent who responds in a timely way to all of a contractor client’s bonding needs will cement a relationship that can last for years.
UNEARTHING OPPORTUNITIES IN RESIDENTIAL CONSTRUCTION
Residential rebound drives contracting insurance opportunities
By Dave Willis
Things are looking up for residential contractors. And that means things are looking up for retail insurance agents and brokers who serve—or who wish to serve—the market.
"According to the December 2013 U.S. Department of Labor report, every construction segment produced additional employment opportunities in November," explains Tim Cappellett, vice president of sales and marketing at Oryx Insurance Brokerage. "Residential building construction employment grew by 1,300 jobs in November and is up 21,300 jobs, or 3.7%, on an annual basis. Residential specialty trade contractors gained 7,100 jobs that month, and have added 81,200 jobs, or 5.4%, since November 2012."
"There appears to be significant pent-up demand for new housing," says Michael Egan, director of property, construction and catastrophe programs at NSM Insurance Group. "Hopefully, that will continue through 2014 and beyond. Our sources in the land development world say their marketplace is more active than it has been in years. Obviously, this is a positive trend, and one that would indicate that the new home housing market is ready to move."
Ryan Schwartz, chief marketing officer for US Assure, has observed this as well. "We are definitely seeing more single-family homes," he explains. "Developers had a lot of land on hold for future development, and those projects are starting to come out of the ground now."
Data support what he and Egan are seeing. "The most recent Census Bureau report shows roughly a million residential housing starts projected on an annualized basis," says Schwartz. "While that's still off from the numbers we were experiencing several years ago, it represents significant growth over the prior year, and that's a good thing."
Tom Murphy, RPLU, ASLI, vice president at Quaker Special Risk, concurs. "We have seen steady improvement in the residential construction market over the past two years," he explains. "With housing starts at their highest level in six years, we've seen growth opportunities among existing residential contractors, as well as new start-ups."
He points out that new single-family home starts aren't just coming from the large, national, publicly traded builders. "We're seeing more activity among small, local general contractor home builders, as well," Murphy says.
"In the depths of the recession, a smaller builder might have had one or two projects going at a time," says Schwartz. "Now, we're back to the point where that same builder has multiple projects—maybe up to 10 at a time." His firm offers a reporting form product that lets a builder conveniently report multiple new starts or inventory under a single policy. "As the builders are flexing up, the policy is able to keep up with them," he adds.
Smaller, local builders have seen a significant uptick in large residential remodeling and addition jobs, Murphy notes. "A couple of years ago, home owners and buyers were opting for minimal remodeling work at the best price," he explains. "Now, full basement remodels are running into six figures, and the pool house and the $1,000 faucet are again more common."
Home equity growth and favorable financing have helped fuel this. "Home values have risen, interest rates remain low, and banks have re-entered the home equity line of credit market in a significant way," Murphy explains. "This means more customers have equity they can tap for home improvements they might have shelved a few years ago."
Growth isn't limited to the single-family-home arena. "According to a recent 'Dodge Construction Outlook,' both single-family and multi-family housing will rise by double digits in 2014," notes Cappellett. "While job growth is still slow, interest rates remain at historical lows and all signs point to the Fed taking the necessary steps to keep them there."
"We have seen an increase in activity in the market-rate apartment construction segment, as well as in townhome and condo projects, especially the age-restricted developments," notes Murphy. "As the population ages, we'll see more need for the smaller patio-home age-restricted communities."
Schwartz has seen activity in the multi-family space, as well. "Over the last couple of years, apartment and
condo-type projects have picked up," he says. "They represent an entryway to housing. Multi-family projects rebounded a little earlier than single-family homes, but we expect continued activity."
Contractors should expect to experience a generally stable insurance market. "We don't see a ton of changes," says Schwartz. "It remains a relatively soft market with strong competition. All of the players are fighting for market share."
Build a book
Agents, brokers and providers should expect continued growth opportunities in the segment. "As the contracting businesses grow, the insurance marketplace should, in turn, see an increase in most classes of construction and in most lines of business," notes Egan.
Cappellett offers some simple advice for unearthing opportunities. "Agents and brokers should look around their communities for the largest sources of construction activity," he explains. "Some segments are busier than others, but overall the construction market looks to be strong in 2014. Focus your energy on an area that is active within your sales territory, and become involved.
"The industry has a number of very strong trade associations," he adds. "In many cases, associations focus on specific trades. Pick one and become active. Participate in their tradeshows, attend online Webinars, become knowledgeable in the field and understand your customers' and prospects' business as well as or better than them."
Schwartz encourages what he calls "smart" association involvement. "Homebuilders associations are viable entities and, of course, Chambers of Commerce have stood the test of time," he explains. "Smart involvement means not just being a member, but being active, being part of the process, the planning, the direction. If you do more than just go to the mixers, you'll end up at the front of the room and get noticed."
Egan points out that contractors gravitate to agents with a high degree of expertise in construction. "Coverages are loaded with nuances that can really make an impact on the quality of the product sold," he explains. "It is important to stay abreast of trends and developments and to convey expertise with prospects whose operations you're looking to insure."
"Several carriers use onerous exclusionary endorsements," Murphy adds. "Agents should review coverages and get problem language eliminated, if possible. If that doesn't work, find a market or wholesaler that can better handle the request."
"The 'hot' market is not usually the right choice," adds Egan, "even though they may seem attractive at the time. Agents and insureds are much better served by working with carriers and MGAs with a proven and consistent track record. The full array of underwriting, loss control and claims service often takes years to master, but it is too often overlooked."
Adds Cappellett, "Contractors are paying for your assistance. Be more than just a sales person, more than just a local insurance agent. Become their risk manager, providing consultation along with coverage."
Certain segments offer specialty opportunities. "As home improvement projects are revived, there's a significant opportunity for agents and brokers insuring home builders and remodelers," says Murphy. Schwartz agrees. "There still is a tremendous amount of renovation and remodeling work going on," he notes. "Sometimes it's just more affordable to remodel what you have."
Start-ups represent another opportunity. "We see agents and brokers capturing business with new firms created by executives of larger regional and national contracting firms who venture out on their own," Murphy notes. "Several are attracted to the high-end custom home building marketplace, which has seen steady new starts even during the recession years."
Agents and brokers also have an opportunity on what he calls a "flight to quality," as many residential contractors exit markets with deteriorating financials. "Lower-rated carriers, risk retention groups and risk purchasing groups are losing some business to A-rated markets," he explains. "A careful review of terms and conditions as well as the carrier rating may open some doors."
Schwartz encourages agents to contact former clients. "A contact at a former company may be out on his own, for instance," he explains. "Or they may be with another firm. They have a trade and a skill that lives with them, so they're probably good sources of new business."
He also stresses the importance of maintaining a solid online presence. "While it is certainly a relationship business, it's important to make sure your online agency presence is strong and your Web site demonstrates your viability as a resource for contractors," he says.
"If you have some expertise in contractors insurance, don't limit yourself to your local community," he adds. "The Internet has broken down geographic boundaries. Tout your expertise regionally, not just in your own backyard. That said, don't overlook opportunities in your own community."
Also, he notes, "As the construction up-tick continues, don't forget that a builders risk policy can also be issued in the name of the home owner in cases where the builder may not be your client."
Service customers
Once you have a book of contractor business, work hard to keep it—and keep it profitable. "Your job starts after you bind the business," Cappellett explains. "Too often, producers are focused on percentage of new business written, how big their book is, growth over last year and so on.
"But none of that really matters if you cannot retain the business on hand," he adds. "Retention begins the first day of the policy and continues every day thereafter."
Cappellett offers tips to help boost retention. "Because residential contractors tend to be small, they tend to not have some of the controls in place that larger firms do," he explains. "It's important to train, educate, train, educate, over and over."
One area of training he recommends is risk transfer. "In today's marketplace, it is critical that risk transfer is in place for general contractors," Cappellett says. "Having contractual relationships with subcontractors through hold harmless and indemnification agreements can push liability back onto the subcontractor."
He also recommends teaming up with a carrier that offers training and related services. "Smaller contractors often are pulled in many directions," he notes. "Too often we see a 'Jack of all trades, master of none' mentality where small contractors work outside their specialty. That can put them at risk. It's important to invest heavily in education and offer contractors OSHA training and a vast array of job-specific training."
Schwartz offers a conversation starter that can help bolster the agent-client relationship. It goes something like this: "Congratulations. You're here today. You've weathered a really tough storm. What's different about your business today? Yes, I know you're doing more work, but where is that 'more' coming from?"
"Agents will learn a lot about their clients in that process," he adds. "Letting clients tell you what they are doing may uncover risk management and education opportunities." Such discussions also allow agents to make sure they've assessed the risk properly and adequately protected it.
"Be aware of your client's claims," Cappellett advises. "Be involved in the process, know who the claims adjusters are and educate your client on how claims directly impact their insurance."
He also stresses the importance of understanding state-specific laws and updates in legislation. "New York, for instance, has gone through multiple changes specific to workers compensation," Cappellett explains. "Both New York and the National Council on Compensation Insurance have changed the methodology in which modifications are now calculated. Educate yourself in the nuances of your business."
Understanding coverage nuances is important, as well. "Top agents know the differences in coverage provided by carriers and they are able to explain the potential implications to their clients," explains Egan. "Not having proper insurance could impact the contractor's whole future as a business."
Egan adds, "There are considerable coverage differences from carrier to carrier. The buyer's natural tendency is to look first at premium. With residential construction, that is a mistake. Price is important, of course, but it's like shopping for a car: a Cadillac won't be priced like a Yugo."
Schwartz says, "In conversations with clients, revisit things like deductibles and optional coverages. They may have a different outlook than in the last few years. They may have a higher tolerance for risk retention."
According to Cappellett, there's good reason to work through the issues and build a book of contracting business. "Construction is one of the most diverse, complex and interesting industries within in the insurance arena," he explains. "Take the opportunity to specialize in a segment of the business, and become better than your peers. Become an industry expert and the business will find you."
"A strong construction market is a bellwether for the economy as a whole," Egan adds. "Likewise, every insurance line of business gets a shot in the arm when the construction market is in good shape."
Surety Bonds: Growing in a Stable Market
As the economy recovers, surety is a bright spot for agents and brokers
By Dave Willis
As the economy continues to rebound, surety bond leaders are optimistic going forward. "I believe the surety bond market will remain strong and stable in 2014, both for contract and commercial bonds," observes Roland Richter, vice president of marketing at Liberty Mutual Surety. "On the contract side, surety underwriters have adjusted to a prolonged weak construction environment that resulted in fewer bonded construction projects and slightly higher contractor default rates."
"From a contract surety perspective," notes Tom Kunkel, CEO of Travelers Bond and Financial Products, "the economic downturn has taken a toll on business. Federal, state and municipal budgetary constraints have impacted the amount of funds available for capital improvements." This in turn affected the availability of work for contractors.
He sees an upside, however. "Employment is growing, interest rates are still at historic lows, and banks are lending money," he points out. "Disciplined contractors are succeeding, and the construction economy appears to be bottoming out and showing some pockets of improvement. At the same time, some large bonded construction projects that had been delayed in 2012 were pushed to 2013, so the industry has benefited from additional activity at this end of the construction spectrum."
"With the passing of a federal budget, there may be additional construction and commercial contract business that was lost due to the federal sequestration," explains Susan Sallada, CIC, president of Universal Service Agency.
As the economy picks up, so may certain exposures. "It's ironic," says Kunkel, "but history indicates that recovery periods can be fraught with hazards for contractors and sureties, as safety, productivity, and cost inflation of labor and materials erode still recovering margins."
He says the surety industry has seen some elevated loss activity recently. "But it doesn't appear to be affecting capacity; good contractors still can obtain bonding," he explains. "Of course, contractors who haven't been as effective in managing through the lean years are feeling the impact."
Sallada sees strong—and in some cases, growing—market competition. "We're seeing continued competition for rate with the standard contract and commercial accounts," she comments, "and competition is increasing for non-standard business, again on both the contract and commercial side."
"We have no reason to believe the market will do anything other than what it's currently doing, and that is getting more and more competitive," remarks Robert Thomas, president of Hanover Surety. "Favorable underwriting experience attracted people who wanted in on the good returns. Unless and until something material happens to change industry experience, this migration should continue."
Sallada wouldn't be surprised to see some modest market shakeup. "Some companies may exit the surety market because of loss ratios or because they couldn't find enough business to sustain their growth," she says.
Some surety companies may be particularly vulnerable to competitive forces. "Construction express surety programs have become the norm in the industry," Sallada says. These programs are based on the principals' personal credit and offer performance and payment bonds up to $400,000, she explains. "Companies that don't offer these express programs will continue to feel pressure from the loss of business in their transactional segment," she says.
Richter believes that retail agents and brokers with qualified customers will continue to find adequate capacity and a responsive surety market. Kunkel adds, "Notwithstanding the challenges, with the improving economy, we continue to be optimistic about 2014 overall."
Customer focus
Thomas points out that many agents and brokers don't like seeing the market as soft as it is. "That puts existing business under pressure," he explains, "so agents are forced to play defense more to keep competitors from poaching their accounts."
When the level of play deteriorates, he adds, "successful agents are very mindful of their clients and their operations. They work hard to make sure clients aren't misled or misinformed."
Easy access to surety credit, Thomas notes, can lead contractors to get ahead of themselves. "Some think, 'If credit is available, why not use it?'" he says. "Give them too much surety credit and some are tempted to take on more work—work they may not be equipped to do—which can lead to problems."
In today's surety environment, Kunkel says, agents and brokers can add value by helping clients manage risks more effectively. "This includes maintaining good discipline and foresight regarding risks associated with economic recovery, as well as continued defense against the failure of one or more subcontractors that can cause significant business interruption," he says. Such failures can severely delay projects and cause significant administrative, accounting and financial issues.
"Depending on the size of the contractor, multiple tools can help effectively manage subcontractor risk," Kunkel notes. "How those tools are implemented can be critical to how successfully a firm manages its way out of the downturn and through a recovery."
Sallada says that quick surety market turnaround can help agents and brokers bolster retention. "Responding to a client's surety needs in a time-sensitive manner is a great way to protect an entire account," she asserts. "The Internet has made rapid response something that is expected. Agents should assess surety markets based on the majority of their clients' surety needs and develop relationships with those markets that will support them."
Close client alignment also is important. "Agents and brokers need to understand their client's business plan so that they can anticipate future surety needs," Sallada explains. "Also, clients using express programs should clearly understand the limits of their programs and the items necessary if they anticipate possibly needing larger bonds."
Kunkel points out that current economic trends call for agents and brokers to offer more guidance to their surety bond clients. "It's a good time for agents to advise contractors to prepare their business accounts for bonding opportunities, helping them qualify for adequate lines of surety," he explains. Carriers can assist in the process, he adds.
Thomas encourages agents and brokers to go beyond being placement experts. "Help clients run their businesses better," he advises. "Connect them with better employees, better vendors, better suppliers. Bring differentiating value through extra services that your agency can offer and fill a need."
Growth opportunities
To build their surety business, agents and brokers must make sure they understand the needs of their local bond market and respond appropriately. "Different geographic regions have varying levels of construction activity," explains Richter. "In areas where construction investment is high, producers should focus on contract surety. Where the market has little construction, focusing on commercial is an excellent way to maintain a surety presence until the larger contract surety market recovers."
Thomas suggests casting a wide net. "There are still good opportunities available," he remarks, "but sometimes it requires looking where others aren't. Try to come up with viable alternatives. For example, explore geographic areas with less competition. Be students of the business and try to predict where opportunities might arise."
Being a student involves gathering market intelligence. "Talk to accountants, and talk to politicians and officials who are about to spend government money on projects," Thomas says. "Talk to vendors—those who are, for example, supplying cement or lumber. Try to be a couple of steps ahead of your competition."
Sallada suggests agents start bond discussions before clients do. "By asking regularly about their bonding needs, retail agents and brokers can prepare clients for the information they will need to have regularly updated and begin conversations with surety companies to identify the best market for the anticipated bonding needs," she says. "It is difficult for a surety, as well as a retail agent, to respond to a client when they need a bid bond in two days."
Efficiency is especially important when selling and servicing certain bond clients. "When it comes to small transactional surety needs, agencies and companies need to provide top-level service and at the same time become more efficient," Kunkel asserts. "Online surety bond issuance and reporting will help them do both. Staying on top of advancing technology will help agents grow market share, become more cost effective, and avoid being out-serviced by the competition."
Also important is teaming up with the right market. "A challenge that surety agents and brokers face is aligning customer qualifications with the surety that best services that customer type," Richter explains. "This pairing becomes more difficult when the economic environment increases financial and operational stresses on the customer.
"Agents and brokers should be realistic when evaluating the strengths and weaknesses of their customers," Richter adds. "At the same time, they need to stay current on the underwriting appetites of different sureties."
Parting advice
"The better agents are out there making things happen and trying to develop opportunities, selling their expertise and 'value-add,'" Thomas observes.
Kunkel says, "Agents who practice a consultative approach and sell value-added solutions will win. The best agents and brokers look to create a surety team between client, surety, and themselves."
"Handling the surety needs of clients can be very time consuming," Sallada notes. "If an agency lacks experienced producers and staff, it may be better served by partnering with 'surety only' agencies for the bonding needs of their accounts."
Richter adds, "The producer's value is in his or her ability to preemptively advise customers how to best prepare and present needed underwriting information to the surety. Good producers learn the construction business, build expertise in the surety underwriting process—including financials and construction risk—and maintain transparency between customers and surety underwriters."
The author
Dave Willis is a New Hampshire-based freelance insurance writer and regular Rough Notes magazine contributor.
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