Contractors’ Insurance: The Hard Sell for the Soft Market

Selling Long-term Relationships over Short-term Savings

For contractor Paige Smith of Neuse Tile Service Inc. in Youngsville, N.C., the increase in cold calls she is receiving from insurance agents is a sure sign of the industry’s softening market. A couple times a month an unfamiliar insurance agent phones her company to offer service, she said.

It’s no secret among Smith and contractors like her that current insurance industry market conditions are conducive to lower pricing and, in some cases, enhanced services at no extra cost. Contractors are shopping around more than ever, adding to the competitive frenzy.

Meanwhile, agents are trying to get both their insurers and their clients to take a long-term view and appreciate the importance of relationships over temporary price advantages. But it isn’t always easy.

As premiums and commissions decline in the softening market, contractors are seeing insurers and brokers cut back on some of the services that have been traditionally provided, says Robert Duty, president of Dallas, Texas-based Cardinal Risk Management Alternatives.

“In situations where insurers are competing for a piece of business, services are usually in third place to premiums and coverage,” Duty said.

“This is a relationship business,” said Bob Bowles, president of Lake Mary, Fla.-based Stahl, Bowles and Associates, an independent agency. “But a soft market can test these relationships. It’s hard for a contractor to resist paying less, even if it’s only for a year or two.” But for a broker, it’s hard to lose a client, he noted.

“Everybody benefits from the soft market except the agent.” Bowles added. “But you’re going to find a way to keep the client.”

Services provided by brokers and insurers are often neglected in the insurance procurement process, according to Duty. He said in so doing, “we fail to place weight on the very things that can help control fluctuation currently and in the future.”

Benefits to Contractors

Contractors benefit from a soft market in several ways, with lower prices being the most obvious advantage.

Paul Jansen, of the managing general agency Jansen & Hastings Insurance Services with offices in San Francisco, Calif. and London, calculates current pricing is 30 percent lower than this time last year and is still going down. “We expect to see a continuing decrease over the next 12 months, and a leveling off by the end of 2008,” he said.

According to Bob Marshburn of CertifiedRiskManagers.com, the residential contractors’ marketplace in most areas is not as soft as it is for commercial contractors, but some sectors have seen substantial changes from just a year or two ago.

“Rates and minimum premiums are dropping fast,” Marshburn said. “The receipts for most residential contractors have dropped substantially from a year ago due to a combination of the slow down in construction and so much of the business being done in wrap-ups. Minimum premiums that were once well in excess of $100,000 are now down to as low as $40,000.”

Beyond pricing, coverage enhancements are also part of the current soft market bargain for contractors.

Coverage enhancements tend to be negotiated on a case-by-case basis, according to Jansen. “Markets are looking to keep these long-term profitable clients by offering coverage that is not available elsewhere.”

As examples of coverage enhancements Jansen cited limited professional coverage for architects, surveyors and engineers, applicable law extensions, lower minimum premiums at audit and, in very limited cases, defense outside the limits.

Marshburn agreed: “Higher limits and excess coverage, once so badly needed and unavailable, are now easy to get.” Specific terms and conditions can now be negotiated without the “take it or leave it” attitude of the past, he added. “Minimum earned deposit premiums are more flexible. Rates and minimum premiums have gone down substantially. Rates are about 50 percent less than what they were a year or so ago.”

But Jansen warned that some of the more aggressive carriers are not necessarily ones contractors can count on for the long haul.

“Some of the more aggressive coverage enhancements are being offered by new carriers to the contractor sector who do not understand the implications of providing such enhancements — particularly defense outside the limits,” Jansen said. “These markets write the business in the short-term offering lower pricing and wide policy forms but do not tend to be long-term players in the market when the losses start to hit. Contractors should be wary about placing their business with these markets as it may be more difficult to build a relationship back with a prior market.”

CertifiedRiskManagers.com’s Marshburn points out that there are now more contractor insurance programs available with reduced pricing and additional capacity, and he cautions that while some are very good ones with strong carriers, others are poor firms with little coverage and weak carriers.

“Some of the carriers are actually managing risk through better loss control resulting in better loss experience,” Marshburn said. “But there is a need to be very careful out there when doing comparative shopping.”

Service Counts

Cardinal Risk Management Alternatives’ Duty has a laundry list of service-oriented factors that he believes should be addressed with clients in order to enhance stability in a contractor/insurer relationship. He said there are issues that must be ingrained into the process — every time — no matter how basic. He maintains that it is essential to assist clients with the evaluation of options received from the insurance market. Using best efforts to place insurance on behalf of the client as directed by the client and promptly responding to coverage questions are important in any market.

Agents should follow-up with insurance carriers for timely issuance of policies and endorsements, to ensure binders are delivered on or before the effective date of coverage being placed, subject to placement, Duty said.

“Our experience shows that as the market softens, brokers are more careful in what services are provided without extra compensation,” Duty said. “Even when extra compensation is provided, the type, quality and quantity have already been impacted as the broker has had to make adjustments for an anticipated overall reduction in revenue.”

The softening market has similar effects on services provided by insurers, he said.

Duty claims construction contractors need to make a clear distinction between “promises” and “service agreements.”

“Promises are where types and levels of services have been discussed and agreed to but never documented,” Duty said. “Sometimes this works and sometimes it doesn’t; in the construction industry you wouldn’t expect this to happen — but it does all too often.”

Duty said he believes that the written service agreement is in the best interest of all parties and should be provided in sufficient detail including the expected outcomes, deliverables and bottom line cost.

“The soft market gives brokers the opportunity to use their knowledge not just for lower prices, but to improve the quality of coverage for their insureds and do a better job for everyone,” Marshburn said. But to do this effectively, it is more important than ever that brokers have a command of the issues involved, not just in insurance, but also construction-specific issues, he said.

Valued Long-term Business

Some suggest that insurers are improving service even as they are lowering prices, especially when it comes to valued long-term business. Jansen reports that some carriers are offering better service and are more responsive to clients’ needs. He said carriers are trying to help long-time clients — often more so than for new business, or potentially one-term clients.

“Contractors are in a good position now — service levels are better,” Jansen said. “For example, until recently insurers didn’t put their pricing out until the last minute. Now they’re giving clients 60-day notices prior to expiration.”

But Duty isn’t convinced. He believes insurers pay lip service to service although he wishes they would take it more seriously.

“Sharp market fluctuations could be leveled-off if insurers appreciated the full value of their current clients,” Duty said. “There is not enough emphasis placed on the service aspect of the business. There would be less volatility and cycles wouldn’t be as deep if more emphasis was placed on the service side.”

Joe George, president of IronBuilt, a division of Ironshore, believes there are factors at play now that weren’t evident during the last soft market, which may prevent things from getting as dire. He places the onus on underwriters to make decisions on what makes sense in regard to terms, conditions and attachments — things they weren’t being asked before, he said.

In the short term, a softening market is good for insureds. But when the market ultimately hardens, insureds will experience opportunistic pricing while insurers try to recoup losses.

“In the long run, a soft market is good for no one,” George added.

Topics Carriers Agencies Pricing Trends Contractors Market Construction