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Market Update
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U.S. - Construction
Printable Version
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The insurance marketplace seems to be moving at the same pace as the world economy: slow, cautious, and uncertain. In the last Market Update, insurers had
anticipated that the soft insurance market had bottomed out. Despite these predictions we have seen few price increases, more carriers competing in the marketplace,
and capacity remains.
While the investment market has shown signs of recovery, insurance carriers continue to see their losses increase. Large-risk accounts should anticipate
“flat” or modest decreases in most lines. Others may see “flat” rates to modest increases, and those insureds with less-than-ideal loss experience will
see rate increases upon renewal.
Construction Market Developments
The marketplace for construction continues to be difficult because of the slow economy. While there are signs of recovery, lenders are hesitant to provide funding;
developers are seeking more equity as a result of lender requirements and are hesitant to start new projects. The residential market is still saturated with inventory,
and while apartment owners have seen vacancies decline, the trend is starting to change.
New construction has been limited to federally funded projects. The stimulus package is funding federally sponsored projects, including utility, street, road, highway,
bridge, and transportation work. Commercial and residential construction continues in a holding pattern pending a rebound in the private sector. The energy sector is
strong due to federal sponsorship. Healthcare and educational construction is stable, registering modest growth.
Our construction clients are, for the most part, running out their backlog of work and are cautious in regard to financial projections for 2010. There are more and
larger contractors bidding projects, and more financial competition on those bids. Contractors have scaled back their work force.
Construction Insurance Impacts
While soft market rates are holding on most lines of insurance, this trend will certainly reverse. The question is when?
Most carriers are trying to hold onto the business relationships they have while aggressively seeking new business, which is in part a result of more capacity
in the marketplace. Carriers such as Hartford, Liberty, ACE, and Fireman’s Fund are aggressively expanding their appetite and limits. AIU has reinvested their identity
as Chartis.
To date, underwriting results are not showing the profit carriers hoped for, mostly due to stable rates, increases in loss history, and the absence of investment income.
Further, contractors continue to request relief from the downturn. Carriers are being asked to negotiate new terms because the contactors’ original projections from 2008 are down
anywhere between 30 to 50 percent of estimates. Most contractors are seeing cooperation from their carriers to get them through this challenging down cycle.
Insurance Lines of Business
General Liability
The shrinking construction exposures, and thus the decrease in premium volume, have kept the general liability marketplace for the most part flat. Insureds are being more cautiously underwritten.
Clients should not expect lower premiums unless they are financially strong and have credible loss history to support a decrease in premium.
Auto Liability
Terms remain favorable and the market remains soft. There are new carriers and capacity in the marketplace. Insurers are reluctant to cover accounts that are oriented towards long-haul
and large equipment.
Umbrella Liability
Umbrella carriers have been aggressively seeking market share. Many carriers have increased limits and underwriting capacity. They have been willing to extend terms and coverage or eliminate
policy exclusions. Their largest concern is the impact of the soft primary premium pricing on their umbrella pricing/rates.
Property/Builders Risk
Commercial property rates are generally stable. The exceptions are projects and accounts with significant exposures in coastal areas. Windstorm, storm surge, flood, and earthquake pricing is
either flat or up slightly. Capacity in these segments is limited.
Workers’ Compensation
The workers’ compensation marketplace, for the most part, is holding rates stable. Recent California judicial decisions and denial of premium rate increases will certainly impact the West Coast
marketplace. Additionally, the requirement of the Medicare, Medicaid, and the State Children’s Health Insurance Program (SCHIP) Extension Act have increased expenses to those insureds who must implement systems
to manage reporting.
The above issues, coupled with the pressures associated with the slow economy, low investment returns, and the continued increase in medical costs, will strain the workers’ compensation rating system whereby
carriers will, in the future, feel the effect of this marketplace pressure. To date, however, the marketplace has been stable with the exception of California, which recently announced a 22.8 percent increase to
the “Advisory Rates” effective January 1, 2010. This is on the heels of a decision by the insurance commissioner to deny a 23.7 percent increase on July 1, 2009.
Environmental Liability
A greater public awareness of the environmental exposures associated with construction, such as the issues with Chinese Drywall in Florida, has triggered growth and interest in this line of coverage. The marketplace
remains soft. We have experienced a renewed interest in clients that want to understand these exposures. There are new carriers in the marketplace and greater competition has held rates and terms stable. Coverage for
mold continues to be of primary interest. Project policies for new construction, which includes Contractor’s Pollution Liability, should be offered on all project-specific placements.
Professional Liability
The professional liability market continues to be very competitive with broader coverages including Contractors Pollution Liability. Owner’s and Contractor’s Protective, Professional, and Pollution Liability blend these
coverages along with providing coverage excess/DIC over the underlying Architects and Engineers policies subject to a self-insured retention (SIR). Forms have been further broadened to drop down without any SIR, apply
separate limits, and include faulty workmanship.
Controlled Insurance Programs/Wrap-Ups
The pipeline for projects came to a screeching halt as a result of the 2008 sub-prime crisis, which caused lenders to curtail construction financing. There are signs of recovery, e.g., projects that have been
delayed are now regaining a pulse with new project financing. The insurance market is eager to accommodate, and we continue to see aggressive pricing, broader coverage, and lower deductibles, especially in the
smaller-to-medium-sized commercial and mixed-use project segments.
Carrier Rates and Premium
Contractor renewal rates are holding stable with renewals from the same time last year, although the carriers continue to hint of higher pricing in 2010. Our construction clients may see increased rates,
but with a lower exposure basis at renewal they will likely see a decline in overall premium.
Regulatory Changes/Claim and Legal Issue to Note
The New York State Insurance Department has approved an increase of 4.5 percent in workers’ compensation loss costs to become effective on policies with rating anniversaries October 1, 2009, and thereafter.
The New York State Assessments will also change from 13.4 percent to 14.2 percent of standard premium, effective October 1, 2009.
Medicare, Medicaid, and the SCHIP Extension Act of 2007 will impact TPAs and self-insureds through the obligations they place on those insureds.
Legislation on construction defect claims has been somewhat inconsistent state to state, and carriers will be cautious in the policy language to attempt to limit coverage. The coverage exclusions and
endorsements vary from carrier to carrier as to how these claims may be applied, and certainly state court cases will impact the placement of coverage in those jurisdictions where the law is in flux.
New Exposures and Coverage
“Green” Buildings
The increase in the projects that include integrated delivery systems and “green” buildings which offer/sell energy efficiency to their customers, and the coverage being offered by carriers, is expanding
but is still a very disoriented product. More and more carriers are trying to address these issues through new coverage forms and policies that address these exposures. Coverage is evolving and needs
additional refinement that specifically addresses the project concerns and exposures.
Distressed Properties/Partially Completed Projects
There are myriad exposures that may arise from partially completed projects. This includes the exposure that lending institutions have in regard to holding title as well as repairs to a project that is
under construction. Additionally, the acquiring entities have considerable exposure entering into purchase contracts on these once-dormant ventures. A risk review is imperative. A review of the
purchase agreement (asset versus entity), prior policies, documentation, and the engineering status of the project is the first step. Clarification of any ongoing operations and defining the work to be
completed are vital in determining new coverage moving forward to mitigate the potential future losses that may arise from the project.
Summary
2010: What is the economic outlook for the industry? Our contractors are hopeful. The insurance market for the construction industry will certainly look to turn as the economy begins to rebound, particularly
when the housing and retail operations side begins to recover. Most financial experts expect the economy will not recover until 2010, but even then at a growth rate well below the last five years. As such, the
recession will continue to constrain top line growth, imposing more pressure on insurers to reduce expenses and increase rates.
Markets are still aggressively pursuing new business. Incumbent markets may push for rate increases, but competition will initially minimize this impact, especially on larger accounts with favorable loss experience.
But once the economy starts to turn, the insurance markets will respond quickly in their attempt to capitalize on the change in economic conditions.
Contractors should expect their insurance partners to become less accommodating over the next year. Expect greater due diligence in underwriting. Allow for more time to consult with your carrier and inform
your client of what lies ahead.
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Please contact your Lockton Representative for further information regarding any information contained in this
market update.
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Stacy Pocrass
Vice President
Account Executive
Denver, CO
Tel: 303.414.6174
E-mail: spocrass@lockton.com |
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Joe Pizzi
Vice President
Account Executive
New York, NY
Tel: 646.572.7320
E-mail: jpizzi@lockton.com |
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Paul Primavera
Senior Vice President
Claims
Washington, D.C.
Tel: 202.414.2620
E-mail: pprimavera@lockton.com |
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