Business Insurance Magazine observed a significant decrease in construction insurance spending during the economic recession. “As construction spending fell, there was a near equivalent reduction in construction insurance spending,” said Tim Kania, senior vice president of construction at Liberty International Underwriters, a division of Liberty Mutual Group Inc., in NY.
“For nonresidential construction, insurance spending is off 25% to 30%, or even more than that, because rate degradation was going on at the same time,” said Tom Miller, senior vice president at Lockton Cos. L.L.C. in Kansas City, MO. The recession and weak economy hammered the construction industry across all segments, with the sharpest blows hitting builders that specialize in private residential construction, and subcontractors and small contractors in all sectors.
Large, diversified contractors entering the recession with strong backlogs protected their bottom lines as revenues sank. In the face of fierce competition, they have pursued profitable work in their competencies rather than chasing unfamiliar work to increase revenues.
The vast majority of contractors in the US are small businesses. Those that have survived have shed employees and costs, but their long-term health is in question, sources said. “We expect to see more subcontractor failures in the coming months,” said Miller.
“There has been a significant impact on the insurance community because they had less (construction) exposure to insure,” said Paul Becker, Nashville, TN-based chairman of the construction practice at Willis North America, a unit of Willis Group Holdings P.L.C.
New carriers have entered the market, capacity is ample, and rates have been competitive for most construction-related coverages, sources said. But with the downturn, combined with catastrophic losses in 2011, “we’re starting to see signs of rate hardening,” said Michael Anderson, U.S. construction practice leader at Marsh Inc. in Philadelphia.
“Insurance companies have come through the downturn and their balance sheets are in pretty good shape,” he added. “How (construction) companies and owners protect themselves is partnering with the right people—not the least expensive, but those who understand your exposure, who have sufficient capacity, longevity and financial stability,” said Kania.
Rates are not as competitive for professional liability, as more contractors take on the added liability for the design as well as the construction of a building, Becker said. Workers compensation rates also may see a hardening in 2012, sources said.
The surety market is “healthy and profitable,” said Rick Ciullo, chief operating officer at Chubb Surety, a unit of Chubb Corp. in Warren, NJ. “Contractors with good business plans and strong financials should have no problems finding surety.”
“We have not seen a wholesale closure of businesses or a big uptick in loss ratio,” he said. In 2008, Ciullo said, “we thought it would be a bloodbath in 2011 and it would show up in surety. That hasn’t happened.” He added, “We expect failures to increase when the economy picks up” as weakened contractors can’t qualify for surety and lose business that becomes available.
Michael Bosse, chair of law firm Bernstein Shur Sawyer and Nelson P.A.’s construction practice group in Portland, Maine, said that with money tighter, contractors are operating with fewer and often less-skilled employees. “In my practice in the past couple of years, I’ve seen many more performance bond claims than I ever had before,” he said. As a result, contractors have not been able to get bonding, “which cuts them out of a large sector of government work,” he said.
State and local governments, which depend on property taxes, will have less money to spend on needed infrastructure repair, including roads and bridges. Versions of a model, known as P3, in which architects, engineers and builders partner in a risk-bearing consortium, are popular in Europe and Canada and “is starting to take hold in the U.S.,” said Henry Lombardi, executive vice president for Aon Risk Solutions’ construction services group in NY. But the model creates challenges for insurers, who are trying to develop coverages for those projects. Each state has different legislation for these partnerships and “there is no uniformity in contracting,” he said. Read More.