From the March 7, 2011 issue of National Underwriter Property & Casualty • Subscribe!

Hurting Construction Players See Pockets Of Hope In Tough Times

Impacts of downturn have not hit surety line yet; sizable storm looms

Heavy competition, job scarcity and a buyer’s market will continue to stand out as the top challenges facing the construction-risk segment this year.

Another key area of concern: the possible repercussions for commercial general liability policyholders from pending legislation that could again considerably alter the definition of an “occurrence” in contract language in yet another state.

Also causing worry are the rising costs of collateral for some insurance programs, such as workers’ compensation, green building and LEED certification, and contractors’ professional liability insurance.

But despite these pressure points, “people are cautiously optimistic” about the future, said Mary Ann Krautheim, Risk Solutions’ Client Strategy Officer for Aon’s Construction Services Group in Minneapolis. “[But] banks have to start lending.”

While market leaders predict soft market conditions lasting into 2012—perhaps firming up only by 2013—the Obama administration’s proposal for an additional stimulus package to repair and improve the nation's infrastructure could accelerate that recovery timeline.

And pockets of the commercial building sector remain fairly robust even today. 

Mark Reagan, chairman of Marsh's Global Construction Practice in Morristown, N.J., said the construction-risk segment as a whole is focused on certain industries whose economic fundamentals remain strong: health care, entertainment (casinos) and education.

Aon sees strength in hospitals, clinics and military housing, said Ms. Krautheim.

On the pricing front, large carriers are seeing the impact of loss development, especially in general liability and workers’ comp lines, Ms. Krautheim said, adding that they are trying to target certain sectors or accounts to strengthen their pricing a little bit.

“There is still a lot of competition in this space. Certain carriers are looking at strengthening rates where they can, or letting some business go if they don’t get the right price,” she said. But for every longtime carrier, there’s a new entrant hungry for business, and that will offset that rate strengthening, she said.

In terms of regional differences, carriers are seeing an uptick in construction recovery for the southern part of the country, especially with contractors who do infrastructure, health care and alternative-energy work, said Scott Rasor, head of Construction for Zurich North America Commercial in Schaumburg, Ill.

 “There is still much [insurance] capacity as assets have returned post recession. Some lines of business may see rate firming, especially long-tail lines like general liability and professional liability,” he said. “This is a direct relation to loss of investment income on company portfolios for long-tail lines.”

Jamie Knoop, senior vice president, Lockton Construction Services for Southern California, sees commercial construction as generally flat, with new construction of office buildings modest. He said the biggest segment of growth is hotel construction; other growth markets include energy and environmental, solar energy, and waste and groundwater facilities.

He characterized the residential construction market in California overall as terrible, with flat growth rates continuing through 2011—although there are pockets of growth in some areas, especially in parts of Southern California, he said.

For insurers, however, surplus remains at high levels, allowing them to continue to remain competitive. Builders and developers see strategic opportunities during 2011 to develop land into finished lots, with construction beginning in 2012 and the insurance market returning to a seller’s market around 2013.

“We’re seeing 2013 as the recovery,” Mr. Knoop said.

Surety: Soft Now, Storm Brewing

From a surety perspective, the economic environment in construction is “awfully soft,” said Patrick Pribyl, senior vice president for Lockton’s Kansas City-based construction-surety practice. “There are a lot more contractors calling in fewer jobs, so profit margins have all been squeezed.”

As the surety business is more credit-market driven than insurance products, the economic downturn has not quite hit yet. While the segment is continuing to see subcontractor defaults, most of those are being absorbed by excess capacity and haven’t yet worked their way up to be surety losses, Mr. Pribyl said.

When the economic downturn does hit the surety business, however, Mr. Pribyl anticipates it hitting like a large Katrina-type storm. “It’s somewhere off the coast, and we’re not sure how or when it will land and how much damage it will do,” he said.

Legislative Uncertainties, Opportunities

Contractors and commercial insurers also are eagerly watching the progress of South Carolina’s Senate Bill, S. 431, which would reverse a recent court ruling on what constitutes an “occurrence” in commercial general liability insurance contracts. Similar bills already have been passed in California and Hawaii.

“With 50 states interpreting the CGL cover, it is a challenge to help meet contractors’ needs,” Mr. Rasor said.

It’s “scary,” Ms. Krautheim added. “Where there are large losses, insurers will tend to look at prevailing case law. The bigger the loss, the more difficult it has been for contractors to feel assured that CGL policies are going to protect them.”

The construction industry and its insurers are also eagerly eyeing the possibility of additional infrastructure dollars from Washington. The infusion of a second round of stimulus funding, whether targeted for high-speed rail projects or other transportation initiatives, would be a big boost for the construction sector—and for the economy as a whole, said Ms. Krautheim.

“We’re falling further and further behind globally, and a strong infrastructure helps all business sectors [achieve] economic growth,” she said

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