Specialty Lines Market
Contractors market—residential & commercial
Hopeful predictions, product enhancements, ongoing challenges are in store for contractors in 2008
By Larry G. France
Home foreclosures are at an all-time high. Builders have large inventories of unsold homes with few prospects for the near future, and some are closing branch sales offices. Real estate prices are falling, and many home owners wishing to sell are resorting to offering “special” packages in order to make the sale. In addition to these problems, builders face increases in their cost of materials and other operating costs, as well as legal issues.
David Seiders, chief economist for the National Association of Home Builders (NAHB) says, “It’s no surprise that builders are starting fewer homes and pulling fewer permits for new home construction at a time when home buyer demand is weak and there’s a heavy supply of vacant homes on the market. We expect the supply/demand balance to improve during the early part of 2008, supporting the early stages of recovery in starts and permits during the second half of 2008.”
NAHB says that single-family housing starts declined 5.4% in November 2007 to a seasonally adjusted annual rate of 829,000 units, the lowest level since April 1991. Meanwhile, permit issuance for new single-family homes declined 5.6% that month to 764,000 units, their lowest level since June 1991. Additional information is available at the NAHB Web site at www.nahb.org.
“While the residential construction segment has seen a marked slowdown, Zurich is still experiencing growth in the commercial builders risk segment and foresees a bright future for both the residential and commercial construction segments in the long term,” states Jeff Benson, senior vice president for Zurich Insurance Services. As is traditional in times when new residential construction slows down, remodeling expenditures increase, he notes.
Zurich recently introduced a remodelers builders risk product that includes coverage for structural changes, something that could not be covered under their previous coverage form. Benson says that according to a 2007 Harvard University housing study, “State of the Nation’s Housing,” household growth between 2005 and 2015 should exceed by some 2 million the strong 12.6 million net increase experienced between 1995 and 2005. The expected growth will be fueled mainly by immigration and the continued increase in household wealth, which began over the past 20 years.
“We are seeing a significant reduction in the numbers of new starts for residential builders due to the housing slowdown,” says Lisa Finch, chief underwriting officer—builders risk at Britt Paulk Insurance Underwriters. “Commercial projects are taking longer to close, and rates remain competitive in this sector. The key to underwriting a profitable book is to remain selective in our underwriting approach and to keep the terms and conditions at reasonable standards. Dealing with reputable, experienced contractors is essential to this goal. We try to ascertain whether contractors are bonded for projects, or if a financial institution has properly cleared the contractor for the project. The financial health of the contractor at the small residential level is harder to gauge, but years in business is a good indicator of their ability to manage the turndown in the marketplace.”
As in the property market, the ability to place business tends to depend on geography. Some states have certain laws and other legal obstacles that make already difficult risks even more of a challenge.
Jim Godfrey Jr., of Casualty & Surety, Inc., says, “Montrose states (i.e., construction defect states like California, Arizona, Nevada and Florida) continue to prove difficult for policyholders to find more than a handful of carriers willing to offer terms, especially CG 2010 11-85 equivalent wording. New York City contractors are also in a difficult area for coverage due to the litigious climate fostered by the state’s Scaffold Law and Action Over Indemnity. However, every other state not affected by these conditions finds a rather robust and competitive market with rate reductions of 10% to 25%.
“General contractors are all over the board,” states Godfrey, “some with two- or five-year sunset clauses (where the casualty reinsurer responds to losses reported only before a predetermined future date), others with a classification limitation and requiring subs to carry same or equal limits and excluding uninsured contractors. Some even have a construction defect exclusion. Artisans are not as bad, but many carriers exclude punitive damages, have a class limitation or new habitational exclusions.
“In Florida,” Godfrey continues, “there still seem to be a lot of issues with residential contractors. The minimum and deposit on surplus lines has given the contractors some difficulties. It is hard to go one year with three storms and lots of business to the next year without any storm activity.”
Godfrey points out that many companies are still limited on coverage for the residential contractor and, if coverage is given, it may be limited. He adds, “We have not had any luck with carriers providing coverage to contractors for tract homes or condominiums.”
Casualty & Surety also specializes in contractors involved in mining and oil and gas, along with blasting, labor, building, pipeline, drilling and various service contractors.
Lynn Wilhoite, director of underwriting, commercial specialty division of Appalachian Underwriters, Inc., says the market will continue to soften, especially for artisan contractors as standard lines carriers broaden their appetite on this class. “Artisan contractors is where most of the competition is occurring, with prices around 10% lower than this time last year.” He notes that there is not as much competition in the general contractors sectors, where coverage features and eligibility criteria are the driving forces as to where business is written.
“We believe the market for smaller general contractors is insulated from the sub-prime woes and slowdown in new housing starts,” says Wilhoite. “The larger contractors were affected because of their focus on tract housing, apartments and condominiums. The smaller contractors built five to seven homes last year and are going to build four to six homes this year. They aren’t over-extended builds, but mostly pre-purchased contract builds.”
Wilhoite says that agents should look for hidden exclusions or mandatory endorsements limiting coverage in policies. “Read the fine print, as it varies by carrier. Our experience shows that many carriers use the CG 22 94 exclusions, declining coverage for subbed-out business exposures. As general contractors take on fewer full-time employees, this is a huge selling feature. It gives them the flexibility to remain fluid with staff and not have to worry about maintaining a specific ratio, or using subs exclusively. It is important to understand the insured, underinsured and uninsured nature of the general contractor’s subcontracted business.”
One of Appalachian’s targets is general contractors with less than $7 million in sales and fewer than 15 home starts per year. New ventures and paper general contractors with 100% subbed-out business are acceptable, as are roofers.
The vast majority of an agent’s contractor risks will require a bond of some type. Terry Lukow, executive vice president of Travelers Bond, Construction Services, comments, “The middle surety market today is as competitive as we’ve seen in a decade. There is a big overlap for the middle and large markets as the work programs of many middle market contractors have grown. For large contractors, with work programs of approximately $100 million, there is sufficient surety capacity available.”
Lukow continues, “For mega contractors, with work programs exceeding $250 million, this sector has seen the most consolidation of carriers providing capacity, although with reasonable pricing and underwriting terms. The capacity needs of mega contractors in the billion dollars-plus projects are typically met by the owner’s acceptance of a reduced bond amount. Contractors risk remains a major focus as project owners continue to push risk onto the contractor.”
For additional information regarding coverages and programs for contractor risks, log on to www.insurancemarketplace.com. Click on your state, the coverage or type of risk and markets available are listed.
Upcoming Specialty Lines Market articles include Recreational Vehicles and Watercraft in March; Special Event Coverage, including Prize Indemnification and Weather Insurance in April; and Social Services in May.