High-tech solutions for complex construction risks
Technical Risk Underwriters, a new unit of Ryan Specialty Group, brings A rated capacity to a challenging market
By Elisabeth Boone, CPCU
Tough risks need savvy solutions—and they don't get much tougher than complex CAT-exposed construction projects and property risks.
Bringing fresh, top-rated capacity and decades of experience to this demanding market is Technical Risk Underwriters (TRU), a managing general underwriter launched in January 2011 by Ryan Specialty Group Underwriting Managers, LLC, a subsidiary of Ryan Specialty Group.
Based in Austin, Texas, TRU's team of veteran underwriters, engineers, and construction specialists is headed by Michael J. Pilla, president and chief executive officer. Pilla has more than 36 years of experience in underwriting complex construction and marine lines of business. He has held senior management positions with leading carriers and MGUs and is excited about the opportunity to leverage the TRU team's talents to deliver best-in-class solutions for sophisticated construction and property risks. He's also enthusiastic about joining forces with the Ryan organization and its founder and president, Patrick Ryan, who established Aon some 40 years ago.
"Being part of the Ryan Specialty Group, with its depth and experience, is huge for us," Pilla declares. "RSG has accomplished so much within a short time, and we benefit tremendously from our association with Pat Ryan, who has had such a long and distinguished career."
Other members of TRU's management team are Ryan Scheinfeld, chief operating officer; Chris Burns, vice president-catastrophe underwriting; and Dean T. LaPierre, chief underwriting officer.
TRU offers high-limit fire and Cat capacity for risks in the course of construction as well as a difference in conditions and deductible buy-down program for projects of all sizes and scope. The program is written with insurers that are currently rated A by A.M. Best and have the capacity to provide coverage for up to a 36-month term. TRU is in the process of developing additional products for construction including power generation.
TRU's target classes are four-wall construction; engineered risks; civil works, including water treatment; street and road; commercial and residential master programs; and military and public entities.
Coverage can include named windstorm and storm surge; earth movement including sprinkler leakage; flood; and a broad form that includes soft costs and extra expense.
Capacity drives competition
Asked to comment on current trends in the markets TRU serves, Pilla points to a seemingly contradictory pattern.
"Over the last two years, despite the economic downturn, more capacity has come into the market for large construction projects than I've seen in 30 years," he says. "I think a key reason is the affordability of reinsurance; another factor is the misconception that anybody can make a profit underwriting construction or builders risk.
"Over the past five years, some of the large standard markets that typically write just small builders risk in their inland marine portfolio have been able to increase their capacity significantly because of cheap reinsurance," Pilla explains. "The availability of cost-effective reinsurance allows these carriers to write projects that are much larger and more complex than anything they have handled before."
Moving into unfamiliar territory, Pilla observes, "Some of these markets may not understand the exposures and may offer terms and deductibles that ultimately will produce bad results for them. The introduction of new capacity, combined with the shortage of projects, has resulted in a highly competitive market for these risks over the last few years."
When the losses start to come in and standard carriers lose their appetite for complex construction risks, Pilla says, the business will find its way back to the specialty underwriters who understand the exposures and price them appropriately.
"We're coming to the point where that may happen over the next couple of years," Pilla says. "Some projects go on for two to five years, and the book doesn't fully develop until those projects are complete." Faced with substantial losses, he notes, standard carriers will return to writing their traditional lines of business and leave the complex projects to the experts.
Recession's harsh impact
The recession and the less than robust recovery have had a devastating effect on the construction industry, where a lack of funding for projects has led to drastically reduced demand and massive layoffs.
"Over the last couple of years, unemployment has been as high as 20% in the construction industry," Pilla says. "Because of the shortage of projects, the industry has become more competitive. The economic downturn has affected the entire supply chain. Among recent trends are increased bidding for new projects and the need for contractors to streamline construction operations to minimize waste and cut administrative costs. We're seeing a much greater sensitivity to pricing and costs," Pilla remarks.
"A troubled economy creates a lot of pain in the short term, but in the long term it will drive innovation in the construction industry," he asserts. "Margins are thinner, so contractors and project teams need to embrace new technologies in design, tracking, submittals, productivity, and real-time pricing. We're seeing some signs of improvement, but so far as the construction industry is concerned, we're still in a recession."
Amid the general gloom that surrounds construction, Pilla points to some bright spots among the kinds of risks for which TRU arranges insurance.
"We're seeing a lot of projects for public and private institutions, like hospitals," he says. "Military housing is a fairly strong segment; over the last couple of years there's been a big push to improve military housing, and the government is building Warrior Transition units in a number of cities to support and rehabilitate wounded soldiers.
"Apartment construction is another strong segment," Pilla continues. "Because of the foreclosure crisis and the adoption of stricter residential lending standards, we're seeing growth in apartment construction at all levels, from affordable garden units to luxury apartments."
As many states struggle to balance their budgets in the face of billion-dollar-plus deficits, Pilla notes, the country's infrastructure continues to deteriorate because states have no money for repair or replacement of roads, bridges, tunnels, and water treatment facilities. "Some federal money has been set aside for these projects, so over the next couple of years we expect to see strong growth in this segment," he remarks.
"The weakest segment, of course, is residential homebuilders," Pilla says. "During the boom years, a lot of developers were buying big tracts of land and building new neighborhoods and spec homes. Even today, five years after the housing market collapse, there's a lot of standing inventory. This is problematic not only for developers and home owners but for the insurance industry as well."
In the same vein, Pilla says wryly, "Commercial office space is not a hot market, for many of the same reasons that residential construction is in such dire straits."
Over recent years, stunning advances in materials design and construction techniques have transformed the construction of everything from modest single-family dwellings to extraordinarily complex engineered projects. These advances can dramatically improve the integrity and durability of structures, and at the same time they create new exposures that require sophisticated risk analysis and underwriting.
"We've seen some great strides in engineering structures to better withstand earthquakes and windstorms," Pilla says. "Some of that progress is driven by changes in the U.S. general building code, and some is driven by advances in technology and design. We're also seeing a move to develop projects that minimize the impact on our environment. The U.S. Green Building Council has developed the LEED (Leadership in Energy and Environmental Design) certification program for new construction. 'Going green' is becoming increasingly popular," Pilla comments.
That said, he adds, "Today developers increasingly are demanding evidence that green building techniques are translating into reduced operating costs as well as a reduced carbon footprint. Owners and contractors are more focused on determining whether green methodologies are having the desired impact on the bottom line as well as on the environment."
"Life cycle" risk management
For the large and complex construction and property risks for which TRU arranges coverage, loss prevention and risk management are of critical importance.
"Every underwriter has a different idea of what loss control means, and that's the basis on which they decide what loss control services they'll deliver to their clients," Pilla says. "At TRU, we adhere to a real 'life cycle' risk management philosophy, and we commit both our in-house engineers and our outsourced engineering consultants to a regular and rigorous schedule of loss prevention activities for every project we underwrite.
"Our approach serves the vital purpose of informing all the parties—owners, contractors, retail brokers—about critical exposures, project conditions, and mitigation steps that should be considered to reduce the likelihood of costly damage and delays," Pilla explains. "We believe that the underwriter should be in proper alignment with each individual project team as well as the owner. To us, good communication with the broker and the client is just as important as committing the time and resources we invest in every project," he says.
"The one constant in construction is that change is inevitable," Pilla says. "A good underwriter understands that, and also understands that he is part of that process. We can't be so rigid that a change impedes our ability to deliver for our client.
"At TRU, we have a big advantage over a lot of underwriters because we're so thorough and thoughtful about a project before it begins, and we become an active partner in the project all the way through as we deliver our engineering and loss control services," Pilla says.
Analytics are key
As an MGU that specializes in large, complex construction projects, TRU uses sophisticated analytics to identify and quantify the risks to which each project is exposed.
"We insure our clients' exposures to physical losses, typically those that are driven by forces of nature," Pilla says. "The universe of information available to assess these exposures, and the scientific and technological advances that have been made to catalogue historical occurrences and forecast future events, seem to be expanding at an exponential rate. We're committed to adapting these advances to help clients understand their exposures and make informed risk transfer decisions. We've pioneered some methods of analyzing and understanding exposures that help make the insurance buying process less of a mystery," Pilla says.
"We try to be transparent and interactive with brokers and clients in using technology to structure the strongest insurance program available," he asserts. "We'll never be the cheapest solution, but we're one of the easiest underwriters to work with because we understand the construction industry and the insurance marketplace and how they intersect."
For more information:
Technical Risk Underwriters
Web site: www.truins.com