Specialty Lines Markets

Construction market challenges

Insurers face the double whammy of a soft market and investment losses

By Phil Zinkewicz

In the classic Western, High Noon, starring Gary Cooper and Grace Kelly, Cooper is trying desperately, but with little success, to get the townspeople to stand with him and face the criminal Frank Miller and his gang, who are on their way to wreak havoc on the town. But the townspeople are fearful of helping Cooper, and he is facing the prospect of fighting Miller and his gang alone. At one point Cooper visits the town’s former marshal, played by Lon Chaney, to ask him for assistance. Chaney refuses, saying that he is physically incapable of helping Cooper. Holding up his deformed hands, Chaney says, “It seems a man with busted knuckles didn’t need arthritis too. You’d be worried about me. You’d get yourself killed worrying about me.”

In a sense, the property and casualty insurance industry is also suffering a double whammy. Caught in a soft market where pricing is low and competition remains fierce, the industry certainly didn’t need a worldwide financial crisis to boot. As a result, trying to get industry solons to speculate as to when today’s soft market will turn is like eating soup with a fork.

In the contractors insurance end of the business, there is considerable uncertainty as to what the future holds. Chris Chiodetti, senior underwriter and casualty manager of London American Risk Specialists, Inc., an independently owned and operated surplus lines/wholesale brokerage operation, says that, in the artisan contractors area, insurers are loosening up a bit on pricing. That’s because losses have been falling off and lawsuits are down, she says. “However, we have to be careful,” she notes. “Because of Hurricane Ike, a lot of new and inexperienced players have come into the contracting business. Moreover, the financial crisis will probably persist for the next six months to a year, and that could put a good many small contractor operations out of business. That wouldn’t be good for us because our average premium is $5,000.”

Dean T. LaPierre, senior vice president and national practice leader of construction at the wholesale broker Mercator Risk Services, says that contractors are facing leaner times and will have to do some serious belt tightening over the next 12 to 15 months. “This holds true for just about every sector, including housing and commercial construction,” LaPierre says.

LaPierre maintains that current conditions in the contractors insurance market are changing the retail agent’s view of wholesale brokers. “While retailers once used wholesalers just for market access, many retailers can gain market access directly on some accounts. But more and more, retailers are using wholesalers for their technical expertise and knowledge. A perfect example is what is going on in the construction industry. With dollars moving out of the high-end residential construction business, more money is government backed and flowing into more specialized building such as wind farms, hydroelectric plants, etc.”

No place for amateurs

A professional engineer himself, LaPierre says that his entire workforce consists of experts who can find solutions and place these more complex accounts, from nuclear power to solar, wind and coal-fired plant construction. “Not only do they have the technical construction expertise,” he says, “but also the ability to work effectively with public entities. Few retailers have the market knowledge to work on these accounts without a wholesaler’s expertise,” LaPierre maintains.

Dan Webb, president of Security Risk Managers, a wholesale broker that specializes in hard-to-place risks, says that one of the problems he sees in today’s contractors market is that standard carriers are moving into the business. “They’re looking to shore up premiums that they’re losing in the standard market by going after contractors, but they’re doing it by going back to cash flow underwriting,” says Webb. “But the standard markets don’t have the experience to write this business properly. Don’t forget, we write the hard-to-place risks, the tough risks that the standard market wouldn’t even consider a year ago. Now they’re chasing the business with ridiculously low pricing. We had a tough contractor who was paying an annual premium of $200,000. Some new players came in and undercut to the point where he is now paying $84,000. They’ll realize they’ve made a mistake when the claims start coming in.”

In terms of new products for contractors, Travelers Construction has announced a new program for plumbing and mechanical contractors that have 20 or more employees.

“It’s no easy task running a high-quality construction firm in today’s business environment,” says Todd Bateson, president of Travelers Construction. “It’s difficult to find enough time to deal with the normal, yet crucial, day-to-day needs of running a contracting business, let alone analyze the evolving risks and construction needs that come with the plumbing and mechanical trades,” Bateson continues. “Our new product, IndustryEdge for Plumbing and Mechanical Contractors, is designed to satisfy each contractor’s situation and to deliver insurance and risk management solutions that are in synch with a contractor’s specific needs.”

Bateson says that this product provides contractors liability insurance, workers compensation, commercial auto, property, inland marine and umbrella, as well as specialized cover-ages that are specific to plumbing and mechanical contractors.

Says Bateson: “Without the proper coverage for each part of their business, many contractors may be leaving themselves open to potentially disastrous business expenses that could be avoided. We have a construction insurance team in place that has significant experience working with plumbing and mechanical contractors, and we built this product utilizing that knowledge and experience, along with feedback from our agents and customers.”

Bateson continues, “With the IndustryEdge for Plumbing and Mechanical Contractors product, Travelers Construction is targeting safety-minded plumbing and mechanical contractors that have 20 or more employees, with a broad spectrum of operations—from air conditioning to heating systems, water supply to sewer hookups, and clean rooms to boilers.”